USDD Collateralized Ratio May Have Been Miscalculated, Well below 200%+

Another algorithmic stablecoin lost its peg. This time it is USDD. Launched by TRON only a month ago, USDD lost its peg as heavy selling across the top cryptocurrencies has persisted.

Justin Sunday, the Founder of the TRON Foundation announced that 700 million USDC will be injected to defend the peg. Additionally, $2 billion were to be deployed and the 'funding rate of shorting #TRX on Binance is negative 500% APR.'

source: twitter

TRON DAO Reserve also announced the measures it has taken to fight off the de-pegging of USDD:

'To safeguard the overall blockchain industry and crypto market, TRON DAO Reserve has increased 650,000,000 USDC supply on TRON. Currently, USDC supply on TRON has reached $2.5 billion.'

At the beginning of June 2022, Justin Sun discussed the safety net for USDD, "Spearheading the Stablecoin 3.0 era, the upgraded over-collateralized USDD will add more diversified features to underpin its stability.

"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.”

A user by the name of Resdegen (an executive from Proximity Labs) tweeted that the 200%+ collateral ratio may be inaccurate. Resdegen explained earlier this month that the collateral ratio of a stablecoin is the ratio of the collateral to the issued stablecoins.

The following formula provides the collateralized ratio:

[USDD collateral (reserves)/ total supply of USDD]*100 = [835.9 million/ 667 million]*100 = 125.32%

Resdegen wondered how did Justin Sun calculate the +200% collateral ratio to USDD. He then discovered that the burned TRX is used in the calculations.

Reserves + 8.29B $TRX burnt (= $USDD supply) = $787M + $667M = $1.454B

Then the collateral ratio = 1.454 / 0.667 = 218%

USDD may be minted by burning TRX. The TRX tokens that are burned to mint USDD are factored in the collateral backing of USDD:

[USDD reserves + burnt TRX / total supply of USDD]*100= [835.9 million + 667 million / 667 million]*100 = 225%

Prior to USDD de-pegging, TRX was over 18% of the reserves. Resdegen calculated that the real collateral without TRX (reserves and burnt TRX) is around 81%.

Due to the recent bear market (dubbed crypto winter), the top cryptocurrencies declined including TRX. Resdegen added that maintaining USDD de-peg depends on the appreciation of TRX (a similar concept was seen in Terra Luna prior to the hard fork). As it was not the case, USDD lost its peg to the US Dollar (USD).

source: coinglass

Whether it was indeed a miscalculation or not, USDD is trading at $0.98 at the time of writing. Despite recent efforts the token is still unable to regain its peg to the US Dollar at the time of writing.