After Terra UST’s de-peg from the US dollar in May, new challenges seem to have risen.
On Monday, June 13th, the Tron-based algorithmic stablecoin USDD, also Decentralized USD, lost its peg to the USD. The coin dropped about 9% to as low as 91 cents, further pushing investors’ concerns.
The de-pegged followed crypto lender Celsius’ announcement to suspend withdrawals and transactions amid the current liquidity crisis within the cryptocurrency space.
In addition to USDD, Tron’s native token TRX has also been down, losing over 5% in value since yesterday.
The Issue with Algorithmic Stablecoins
USDD was created and listed by Tron in April 2022 as a decentralized algorithmic stablecoin.
As such, the coin should count as a stable investment with a one-to-one exchange rate bound to the US dollar.
As the name suggests, algorithmic stablecoins use algorithms that regulate the price according to supply and demand to keep a consistent value of the coin.
Nonetheless, the problem with these types of stablecoins lies in their reliance on demand.
Broad selloffs caused by volatility, uncertainty, and lack of knowledge or information can lead to a crash of the system once the price reaches a certain threshold.
This trend could not only be observed with TerraUSD but also for stablecoins Neutrino and Deus Finance’s DEI.
Preventing Sellouts to Restore the Peg
After TerraUSD’s crash in May, Tron’s founder Justin Sun had decided on a guaranteed collateral ratio amounting to 130% to avoid the same fate.
Now, faced with a possible USDD downfall, Sun hoped to regulate demand by supplying TronDAO’s collateral of $2 billion.
Nonetheless, this strategy is considered highly risky as it is dependent on the number of short bets on USDD.
Should more funds be sold, the price of the stablecoin will continue to drop. At present, USDD’s value has only partly recovered to 97 cents and has thus not yet regained its peg.
The current sentiment of financial markets, coupled with the volatility of various stablecoins has left investors uncertain.
In a further attempt to recover USDD’s peg, Sun has withdrawn 2.5 billion of its native TRX tokens from the Binance exchange, amounting to approximately $125 million.
Thus, TronDAO hopes to limit short positions against USDD “to safeguard the blockchain industry and crypto market.”
While USDD has not regained its peg yet, the withdrawal does show a positive effect on the coins value, leading to an increase of approximately 2.8%.
UST’s Fate as an Outlook on USDD’s Future?
Some are taking to Twitter to compare the happenings of USDD to UST.
The creators of both stablecoins called for “deploying more capital – steady lads” amidst their respective crises. This statement is regarded with mixed feelings from the community, mirroring UST’s downfall a little too closely.
The biggest question that arises now is whether trust in algorithmic stablecoins can or should be restored. Either way, make sure to do your research and read the whitepapers available on our site.
