After Terra’s collapse the Tron stablecoin trembles

On Monday USDD, the stablecoin behind the Tron project, lost its peg with the dollar, slipping as low as 0.91 cents and fuelling speculation about the entire project.

USDD, Tron’s stablecoin, loses peg to dollar

At the most difficult time for the cryptocurrency market, on Monday, the stablecoin backing the Tron (TRX) project founded by Justin Sun, lost its peg with the dollar, slipping as low as 0.91 cents and fuelling speculation that it could end up like Terra, which collapsed along with its UST stablecoin on 12 May.

Oapital (labelled on @nansen_ai), one of the funds involved in capitalising off of the $UST de-peg is now actively making large transfers of $USDD and other stables.

Doesn't look great. pic.twitter.com/DBoubXoWvu

— Nansen Intern 🧭 (@nansen_intern) June 13, 2022

The Nansen company, a blockchain platform that monitors thousands of wallets, pointed out that a large fund that had helped bring down UST on Monday transferred large amounts of USDD and other stablecoins from its deposits.

In response, Tron’s founder and CEO tweeted that the funding rate on the Binance exchange for betting against, or “shorting”, the TRX token native to Tron’s blockchain was negative 500%, another tangible sign that speculation would be actively at work rowing against Tron. But Sun also reiterated that TronDAO would “deploy $2 billion to fight them”.

Funding rate of shorting #TRX on @binance is negative 500% APR. @trondaoreserve will deploy 2 billion USD to fight them. I don't think they can last for even 24 hours. Short squeeze is coming. pic.twitter.com/VRExM6UK70

— H.E. Justin Sun 孙宇晨 (@justinsuntron) June 13, 2022

The DAO foundation itself, which administers the Tron ecosystem, also tweeted on Monday that it had received $650 million USDC to its reserves, as a defence of its stablecoin against the speculation that seems to be raging in the cryptocurrency markets in recent weeks.

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

— TRON DAO Reserve (@trondaoreserve) June 13, 2022

Investors lose faith in algorithmic stablecoins

What is perhaps most worrying the markets at the moment is the fact that USDD is also an algorithmic stablecoin like Terra’s UST. It is based on an elaborate automatic balancing mechanism that involves the alternating creation and destruction of USDD and TRX units. The mechanism then involves “burning” 1 USD of TRX for 1 USDD, should the price of USDD rise above the peg.

Currently, the price of USDD is around 0.98 cents so it is still struggling to regain the lost peg. The issue of stablecoins is becoming one of the crucial points in the entire crypto ecosystem. Many doubt the reserves that the issuers of these coins should hold as collateral. 

Even Tether, the largest stablecoin in circulation, reportedly lost its peg with the dollar on 12 May, only to regain it a few hours later. Many are convinced that should Tether, which capitalizes around $80 billion, lose its peg with the dollar, the entire cryptocurrency market would clearly be at great risk of crashing.