As Another Shaky Stablecoin Breaks The Buck, Institutions Begin Shunning The Sector

USDD, the controversial dollar-based stablecoin founded by Tron creator Justin Tron in May 2022, appears to have lived to fight another day.

After briefly losing its peg this morning, reports had the token trading as low as $.91, it is currently priced at $.99. While USDD has not climbed all the way back to $1, the partial recovery may come as a welcome relief to nervous watchers wondering if the crypto community was about to see its second major implosion in a month.

Despite its recovery, USDD is far from being out of the woods.

For starters, the token is an almost carbon-copy of the doomed stablecoin TerraUSD, which collapsed along with its sister token LUNA last month in a $55 billion disaster that was the capstone of a $1 trillion crypto market rout.

What are those similarities? USDD runs on top of Tron, a multipurpose blockchain that can be used to execute many types of applications, just like UST was tethered to the Luna blockchain. Both USDD and UST employ/employed a similar type of algorithm to maintain the $1 price peg. If the price of either stablecoin fell below $1, an owner could redeem it for $1 worth of LUNA or TRX. Eventually arbitrageurs would, in theory, bring the prices back into sync.

Finally, in the case where the prices did not autocorrect, both platforms stockpiled billion-dollar backstops of tokens used to partially collateralize the stablecoin. The team behind UST used $3 billion worth of bitcoin and about $88 million of Avalanche’s native token AVAX. Tron employs bitcoin and a host of other stablecoins.

Of course, we all know how things worked out with LUNA/UST – there was a spectacular crash. There are specific reasons for why the UST/dollar peg broke when it did, such as the unsustainability of a lending protocol used by holders to generate unsustainable returns north of 20%, or the team’s inefficient deployment of its bitcoin backstop to defend the asset, but at the end of the day many critics felt that UST was bound to fail, no matter what.

Call it hubris, schadenfreude, ignorance, or perhaps idealism, but Sun is hoping that his mulligan is going to turn out better. And perhaps today’s recovery will convince some that Sun can do it.

Retail crypto hodlers may be inclined to believe Sun, but institutions are already heading for the exits. Raghu Yarlagadda, CEO of multi-billion crypto prime broker FalconX tells Forbes that most institutions are now foregoing all stablecoins, including USDT and USDC for straight fiat. He says that while in the past these tokens would have been used for purposes such as generating yield in the wild west world of decentralized finance, they are currently just being used for liquidity purposes on nights and weekends.

As for troubled USDD, it is important to remember the lengths that Sun went to in order to shore up USDD’s price. Over the last 24 hours Sun has announced his intention to deploy up to $2 billion worth of capital to purchase TRX, which is used to redeem USDD and fell 20% overnight, and fight back against short-sellers. Shorting TRX had become such a popular trade that the funding rate for these trades on Binance had risen to 500%.

But that is not all, the team managing USDD’s reserve also announced via Twitter that it put an additional $650 million worth of USDC onto the Tron blockchain, which can be used as necessary to back up the asset and purchase TRX as necessary.

The token is now collateralized to an exorbitant level of 278%, more than double the 130% promised by Sun on June 5 in response to concerns about its solvency.

This was a financial bazooka, and it appears to have helped hold USDD/TRX shorters at bay for the time being.

However, it really doesn’t solve the problem for Sun and USDD in the long term. Ultimately it may not matter how much collateral is used to backstop if USDD if traders do not believe that crypto volatility will abate. Bitcoin is down 50% year to date, and there could be further for it to fall still. Second, while using other stablecoins as collateral could provide a modicum of reassurance, it also undercuts the USDD value proposition. What good is an algorithmic stablecoin backed by centralized competitors?

Additionally, it appears that the Tron DAO Reserve has not learned all of the lessons from the UST collapse. In that case, many UST holders were depositing their assets into a DeFi lending platform based in LUNA called Anchor for unsustainable returns. When it comes to the Tron Reserve, the DAO proudly claims to offer access to ‘risk-free’ double-digit yield subsidies topping out at 35% for USDD holders.

It is unlikely that this is the last time that USDD will need to defend its peg, especially while this crypto volatility continues. Stay tuned.