Why another stablecoin losing its peg isn’t ‘Terra 2.0’

Cryptocurrencies have come under tremendous pressure after the collapse of a so-called stablecoin called terraUSD.

Umit Turhan Coskun | Nurphoto via Getty Images

A controversial stable currency launched just before the collapse of a similar token called terraUSD is struggling to maintain its link with the US dollar.

The USDD, an “algorithmic” stable currency that is always worth $ 1, fell to 93 cents on Sunday. The creator of the coin has amassed a reserve of bitcoins and other digital tokens worth about $ 2 billion to provide a cushion in the event that investors flee en masse.

The situation sparked fears that the USDD could suffer the same fate as terraUSD or UST, the so-called destroyed stablecoin that was part of an experiment called Terra. The collapse of the UST has led to a wider sale of cryptocurrencies, which has been exacerbated in recent weeks by a growing liquidity crisis in the market.

The Tron DAO Reserve, which oversees and manages stablecoin, said some degree of volatility in the USDD’s price was to be expected given its “decentralized” nature.

“Certain% of volatility is inevitable,” the organization tweeted last week. “Currently, the market volatility rate is within + – 3%, an acceptable range. We will look at the market very closely and act accordingly.”

The USDD was trading at about 97 cents on Wednesday.

Despite concerns about a repeat of the Earth saga, experts say this is unlikely to be the case, as the USDD is much smaller in size and has had little acceptance from crypto investors.

What is USDD?

USDD launched in early May, days before UST began to fall below $ 1. Over the past week, it has consistently traded below its expected dollar fixation amid rising sales.

Instead of sitting on stacks of cash and other money-like assets, USDD runs a complex algorithm, combined with a related token called a tron, to maintain a one-to-one link to the greenback.

If this sounds familiar, it is because the Earth UST worked the same way, creating and destroying UST units and a sister currency called the moon to avoid the need to have reserves to support the stable currency.

Another similarity that USDD shares with UST is that it has accumulated a significant cache of other digital tokens to help raise its price in the event that investors withdraw en masse. Terra bought millions of dollars in cryptocurrencies in an effort to keep its currency stable afloat, a move that ultimately proved futile.

The USDD’s use of cryptocurrencies as reserves exposes it to “risks similar to those of the UST,” said Monsur Hussain, senior director of financial institutions at Fitch Ratings.

“Crypts in general are correlated with price during seizure times,” he added.

USDD also offers investors unusually high interest rates – up to 39% – on their USDD deposits. Anchor, a cryptocurrency lending platform, has similarly promoted yields of up to 20% on UST holdings, a rate that many investors now say was unsustainable.

The coin was created by Justin Sun, the cryptocurrency entrepreneur behind Tron, a blockchain that tries to compete with Ethereum. Like Do Kwon, the founder of Terra, Sun has often used Twitter to promote his projects and challenge critics.

The Chinese-born businessman has been involved in numerous controversies and advertising stunts in the past. In 2019, he paid $ 4.6 million for lunch with Berkshire Hathaway CEO Warren Buffett and then abruptly canceled. Lunch finally took place in 2020.

Not another Earth

However, on closer inspection, it is clear that there are some notable differences between USDD and UST.

On the one hand, the USDD is not very close to the Earth scale, whose UST and moon tokens have reached a combined value of $ 60 billion at its height. Therefore, it would be unlikely to have the same effect if it collapsed, according to analysts.

“USDD does not have the weight to cause the same destruction that UST did,” said Dustin Teander, a research analyst at crypto data company Messari.

He added that the use of the USDD is not as widespread as the UST before its demise.

According to public blockchain records, about 10,000 accounts have the token on the Tron network, while just over 100 accounts have it on Ethereum.

If the USDD collapsed, “it would not cause the same degree of contagion or fear as when the UST / LUNA crashed,” Hussain said.

And unlike UST, which was only partially collateralized by cryptography, the USDD intends to be overcollateralized, which means that its assets always exceed the number of tokens in circulation.

Reserve Tron DAO says its reserve contains more than $ 1.9 billion in bitcoins and other tokens, including USDC and tether stablecoins. USDD has a supply of approximately $ 700 million. That reduces the possibility of an Earth-style collapse, according to Teander.

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