Decentralized USD (USDD), the algorithmic stablecoin of the TRON blockchain

Decentralized USD (USDD), the algorithmic stablecoin of the TRON blockchain

Decentralized USD (USDD) is an algorithmic and decentralized stablecoin on the TRON blockchain. Collateralized by the TRX and reminiscent of a certain Terra USD (UST), this stablecoin was created to offer a decentralized and interoperable alternative taking advantage of the TRON ecosystem. Focus on a project which, as soon as it was announced, aroused curiosity and stirred up criticism.

What is Decentralized USD (USDD)?

Decentralized USD (USDD) was introduced in April 2022 by Justin Sun, the founder of the TRON (TRX) blockchain. It is a decentralized algorithmic stablecoin operating on the TRON blockchain. The TRON DAO Reserve issues USDD tokens; DAO stands for Decentralized Autonomous Organization.

This stablecoin was created to offer users of centralized stablecoins, such as Tether USD (USDT) or USD Coin (USDC), a decentralized alternative.

The decentralization of USDD is guaranteed by the TRON blockchain and allows its users to protect themselves from the cryptocurrency market’s volatility.

As its name suggests, the USDD tracks the US dollar price. Thus, its value is, in principle, always equal to one dollar. It is already interoperable since this stablecoin is available on the Ethereum blockchain and the BNB Chain thanks to the BitTorrent Chain, which is part of the TRON ecosystem.

Its interoperability with Ethereum involves a bridge to all the latter’s Layer 2 solutions: Polygon, Arbitrum, Harmony, Optimism and many others.

The price of the USDD obtains its parity with the dollar thanks to an elastic monetary policy which we will detail next. The TRX cryptocurrency plays a central role in stabilizing this stablecoin since it guarantees its value.

Decentralized USD (USDD) Logo

How is the USDD Price Anchored to the Dollar?

The Real Exchange Rate

The USDD relies on a decentralized oracle to determine the true exchange rate with the US dollar. This mechanism works as follows:

  • TRON Network Super Representatives vote for what they believe to be the true dollar exchange rate;
  • these votes take place every n blocks, and the weighted median of these votes is taken into account to establish the exchange rate;
  • rewards are given to Super Representatives who voted within one standard deviation of the exchange rate to incentivize them to vote correctly.

The Super Representatives of the TRON network generate the blocks, aggregate the transactions and receive rewards in return. They can therefore earn rewards by voting for the true USDD exchange rate.

In order to avoid any manipulation of the exchange rate, these representatives are penalized in the event of votes falling beyond the range of one standard deviation.

Limiting these votes to the latter makes it possible to contain malicious behavior since each person must pay 9999 TRX tokens (about 750 dollars in May 2022) to become Super Representative, then he must be elected by the participants of the network. There are 358 of them on the TRON network at the time of writing these lines.

USDD Elastic Monetary Policy

The USDD stablecoin follows the law of supply and demand. When the protocol detects a deviation from its peg (i.e. its parity with the dollar), it acts as follows:

  • Contraction of the circulating supply of USDD when it deviates downward;
  • Expansion of circulating supply when it deviates upwards.

Concretely, when the USDD deviates from its peg, an arbitration mechanism with the TRX token is supposed to restore it. That is, if the USDD drops below the dollar, it is possible to exchange 1 USDD for 1 dollar in the TRX equivalent.

This means that if the price of USDD drops to $0.90 per token, an arbitrage involving buying 1 USDD and sending it to the protocol allows you to receive 1 dollar in TRX equivalent in exchange, resulting in a profit of $0.10.

The USDD tokens thus sent to the protocol are burned, and the TRX tokens thus received are newly issued (mint) tokens. In this case, the circulating supply of USDD falls while the circulating supply of TRX rises.

This mechanism incentivizes users to buy USDD when it goes down to reap profits through the exchange to the protocol since, regardless of the price of USDD, the protocol guarantees 1 dollar in TRX token in exchange. The price of the stablecoin will therefore be restored to 1 dollar naturally, thanks to the arbitrations of the users.

Super Representatives bear the cost of such an exchange in the short term since the issuance of new TRX tokens dilutes their mining power: the ratio of staked TRX to the circulating supply of TRX decreases. The latter absorb this short-term volatility, but this is compensated for in the long term since they collect the costs of the protocol swaps.

Conversely, if the price of the USDD stablecoin rises to $1.10 per token, users can trade $1 in TRX equivalent to the protocol to receive 1 USDD.

Thus, the latter will be able to resell these USDD tokens on the market and reap profits since the price is at 1.10 dollars in this specific case. This mechanism is used to reset the USDD to its normal level of $1.

The TRX tokens thus sent to the protocol are burned, while the USDD tokens received are newly issued (mint) tokens. Therefore, the circulating supply of TRX decreases and that of USDD increases.

Here is a summary of the arbitration mechanism to restore the USDD peg in the event of a deviation and its consequences on the circulating supply of USDD and TRX:

Exchange to protocolUSDDTRXUSDD circulating supplyCirculating supply of TRX
USDD < $11 USDD -> 1 dollar in TRXburntmintDecreaseIncrease
USDD > 1 dollar1 dollar in TRX -> 1 USDDmintburntIncreaseDecrease

There are also slippage fees when trading with the protocol. These are a minimum of 0.5% and are automatically adjusted in the event of significant market volatility.

The TRON DAO Reserve

This reserve is responsible for issuing USDD tokens and ensuring their stability by collateralizing the USDD with its funds. It also aims to establish it as the true currency for making payments.

The reserve, therefore, acts as a central bank for the USDD and rewards its holders with an attractive rate of 30% per annum. It helps centralized and decentralized organizations to accept this stablecoin by implementing this interest rate.

In order to collateralize and ensure the stability of USDD, the TRON DAO Reserve plans to raise $10 billion to collateralize USDD further. It should be noted that it is not possible to verify the composition of these assets supposed to collateralize the USDD at the time of writing these lines.

The TRON DAO Reserve is governed by five members to date. These are whitelisted institutions: Alameda Research, Amber Group, Poloniex Exchange, Ankr and Mirana.

Figure 1: The five members of the TRON DAO Reserve

These members have the right to mint and issue new USDD tokens when trading with the protocol. When the protocol receives TRX tokens, they are transferred to a smart contract dedicated to token burning. Then, the TRON DAO Reserve calculates the USDD token equivalent based on the current exchange rate.

Finally, the reserve transfers these USDDs from the authorized contract and puts them into circulation via a multi-signature arrangement. This is how USDD tokens are newly created.

At the launch of the stablecoin, 1 billion tokens were sent in an authorized contract. At the time of writing, $271 million is outstanding. This means that 729 million tokens are not yet issued and are in the contract.

Members of the Tron DAO Reserve therefore oversee the issuance of new USDD tokens.

Figure 2: Overview of the amount of TRX burned and USDD in circulation (May 13, 2022).

Decentralized Finance (DeFi) with USDD

USDD can be used to generate interest in a less risky way since it is a stablecoin, and in theory, an impermanent loss does not apply to it when locking since it is supposed to keep its parity with the dollar.

As we have seen, the TRON DAO Reserve has set an annual interest rate of 30% for USDD. Here is a non-exhaustive list of platforms on which it is possible to obtain a return with this stablecoin:

  • Sunswap: providing liquidity in the USDT/USDD liquidity pool;
  • JustLend: providing liquidity for the lending platform;
  • providing liquidity in a USDT/USDD/TUSD 3pool;
  • Poloniex: USDD staking.

Figure 3: Overview of the different options for generating a return with USDD on DeFi

Note: It is worth warning here that such a high-interest rate on an algorithmic stablecoin is very attractive, but it comes with risks. The market proved this with the high-interest rates of the UST (about 20% per year), which partly led to the latter’s collapse.

What is USDD Used for?

USDD is an algorithmic and decentralized stablecoin. It is available on the TRON, Ethereum and BNB Chain blockchains.

It allows its users to protect themselves from market volatility, make payments and earn an annual interest rate by staking or providing liquidity to different decentralized finance (DeFi) platforms.

USDD’s decentralization allows it to be censorship-resistant. The valuation of TRON (TRX) and the support of the TRON DAO Reserve are crucial to guarantee the value of this stablecoin.

How to Buy USDD tokens?

USDD is only available on a few centralized platforms at the time of writing: Poloniex and Huobi Global. However, the choices on decentralized platforms are more numerous: Uniswap, PancakeSwap, Curve and platforms on TRON like and SunSwap.

If you want to get USDD, we suggest you buy it on the TRON blockchain to be able to interact with applications natively designed for USDD staking.

Explanations for Buying USDD on SunSwap

  • Go to SunSwap ;
  • Connect your TronLink Wallet to it by having previously deposited funds there;
  • In the Swap tab, look for USDD;
  • All you have to do is exchange your tokens for USDD tokens for the amount of your choice;
  • Congratulations, you are now in possession of USDD tokens.

Our opinion on the USDD of the TRON blockchain

USDD is an algorithmic and decentralized stablecoin that exists to provide an alternative to centralized stablecoins. The USDD protocol adjusts the supply of the stablecoin based on demand to stabilize the price.

It achieves this by using the TRX governance token of the TRON blockchain, which absorbs USDD volatility, as we have detailed. At the time of writing, the USDD is not yet fully decentralized since it is in the hands of the TRON DAO Reserve and its 5 members, which are industry institutions.

The USDD decentralized network will go live on October 10, 2022, when the mainnet launches, according to the roadmap.

It is time to address the sensitive point of this project, the angry subject. These are obviously the mechanisms supporting this new stablecoin, very strongly reminiscent of those of Terra USD (UST).

These are almost identical in all respects. It is therefore advisable to inform yourself about the potential risks that the USDD entail. Indeed, the UST collapsed from May 9 to 12, 2022, due to the loss of its peg with the dollar, as well as the token supposed to absorb its volatility: the LUNA.

The USDD does not seem to bring anything new if we compare it to what the UST proposed in its way of stabilizing the price, nor even to the level of the fixed annual interest rate of 30% proposed, whose origin is not clearly detailed, it seems hardly durable.

Thus, the creation of the USDD could be considered opportunism since if it gains adoption, then a lot of TRX tokens will logically be burned.

This could, therefore, potentially significantly increase the value of the TRX token by decreasing its circulating supply (similar to the rise of LUNA). This is undoubtedly one of the objectives of the founders of this project.

However, it is worth qualifying slightly by emphasizing the commitment made by the TRON DAO Reserve to raise 10 billion dollars over the first 12 months for the collateralisation of this new stablecoin.

Will this be enough to sustain USDD and make it the flagship decentralized algorithmic stablecoin in the ecosystem,  succeeding where UST failed? After the bitter failure of the UST and the LUNA, the USDD will have a lot to do to gain the confidence of investors.

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