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TRON’s stablecoin USDD employs an overcollateralised mechanism to maintain the USD price peg

on Jun 6, 2022
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  • TRON's stablecoin USDD announces an overcollateralised mechanism
  • The collateral ratio will be minimum 130% and can go as high as 200%
  • This move is inspired by Terra's UST collapse

After Terra’s algorithmic stablecoin TerraUSD (UST) failed miserably in May, TRON announced a plan to back up its own stablecoin with more capital on Sunday morning.

An announcement on Sunday says that USDD, an algorithmically stable coin on the TRON blockchain, will now be overcollateralised.

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As one of the safest decentralised stablecoins, USDD now has a collateral ratio guaranteed to be at least 130% and as high as 200%. This is higher than DAI’s ratio of 120%, which is seen as the industry standard.

The members of the TRON DAO Reserve will keep minting USDD by burning TRX. The upgrade strengthens the USDD’s stability and credibility by making the TRON DAO Reserve assets valuable (TDR).

To back the issuance of USDD, these reserve assets would include BTC, TRX, and multiple stablecoins like USDC, USDT, TUSD, and USDJ at a ratio of 130%. In other words, each USD is backed by at least $1.3 worth of BTC, TRX, stablecoins, and possibly other highly liquid assets.

Commenting on this decision, Justin Sun, Founder of TRON said:

“Spearheading the Stablecoin 3.0 era, the upgraded, over-collateralised USDD will add more diversified features to underpin its stability.” 

He further added:

“The $10 billion reserves pledged by the TDR will enable USDD to become the most reliable decentralized stablecoin with the highest collateral ratio in blockchain history. Currently, the 200%+ collateral ratio offers USDD a very strong safety net.”

Stablecoins are the backbone of the blockchain industry, and it’s important to make sure they are protected, transparent, fast, cheap, and scalable. This update has made USDD stronger by adding an extra layer of security to the token’s stability and risk profile, similar to how Maker powers DAI.

What is USDD?

Launched on May 5, USDD is similar to Terra’s stablecoin UST, an algorithmic stablecoin governed by smart contracts and has no collateral backing.

The dollar peg of USDD is set by arbitrage algorithms between USDD and Tron based on smart contracts.

Last month, UST crashed, and in a week, investors lost about $60 billion worth of funds. Since then, algorithmic stablecoins, like USDD, have gotten a lot of bad press.

Now, if the USDD price goes above the dollar peg, investors can always trade 1 USDD for $1 worth of TRX. By selling the newly minted TRX, users can make arbitrage profits from keeping the coin at its dollar peg and vice versa.

With this move, USDD has used both bits of stablecoins backed by collateral and algorithms to keep its dollar peg.