Cryptocurrencies have come under tremendous pressure following the collapse of a so-called stablecoin called terraUSD.
Umit Turhan Coskun | Nurphoto via Getty Images
A controversial stablecoin that launched just before a similar token called terraUSD collapsed is struggling to maintain its peg to the US dollar.
USDD, a so-called “algorithmic” stablecoin that is said to always be worth $1, plummeted as low as 93 cents on Sunday. The coin’s creator has amassed a reserve of nearly $2 billion worth of bitcoin and other digital tokens to provide a buffer in case investors flee en masse.
The situation has raised fears that USDD could suffer the same fate as TerraUSD or UST, the destroyed so-called stablecoin that was part of an experiment called Terra. The collapse of UST triggered a broader cryptocurrency sell-off, which has been exacerbated by a growing liquidity crisis in the market in recent weeks.
Dustin Teander, a research analyst at crypto data firm Messari, said that the USDD’s “delivery” was driven by volatility in the crypto market.
“When people need money in volatile times, they need to get out of other positions quickly,” he said.
“Sizable exits from USDD as well as speculative selling result in short-term deviation from peg.”
But despite concerns about a repeat of the Terra saga, experts say it’s unlikely as USDD is much smaller and has little adoption by crypto investors.
What is USDD?
USDD was launched in early May, days before UST started falling below USD 1. It has traded consistently below its intended dollar peg for the past week.
Instead of sitting on piles of cash and other cash-like assets, USDD runs a complex algorithm — combined with a related token called Tron — to maintain a one-to-one peg to the greenback.
If this sounds familiar, that’s because Terra’s UST worked the same way, creating and destroying units of UST and a sister coin called Luna to circumvent the need to have reserves to support the stablecoin.
Another similarity USDD shares with UST is that it has accumulated a sizable cache of other digital tokens to increase its price should investors pull out in droves. Terra bought billions of dollars worth of crypto to keep its stablecoin afloat, a move that ultimately proved futile.
USDD’s use of crypto as a reserve exposes it to “risks similar to UST,” said Monsur Hussain, senior director of financial institutions at Fitch Ratings.
“Crypts are generally price correlated in times of disruption,” he added.
USDD also offers investors unusually high interest rates – up to 39% – on their USDD deposits. Anchor, a crypto lending platform, also touted returns of up to 20% on UST holdings, a rate that many investors are now saying is unsustainable.
USDD was founded by Justin Sun, the outspoken crypto entrepreneur behind Tron, a blockchain trying to compete with Ethereum. Like Terra founder Do Kwon, Sun has often used Twitter to promote his projects — and challenge critics.
The Chinese-born businessman has been involved in numerous controversies and publicity stunts in the past. In 2019, he paid $4.6 million to have lunch with Berkshire Hathaway CEO Warren Buffett, only to abruptly cancel. The lunch finally took place in 2020.
Tron DAO Reserve, a fund founded by Sun, said that some level of USDD price volatility is “inevitable” due to its “decentralized” nature.
“Currently, the market volatility rate is within +- 3%, an acceptable range,” the organization tweeted. “We will monitor the market very closely and act accordingly.”
Not another Terra
However, upon closer inspection, it becomes clear that there are some notable differences between USDD and UST.
For one thing, USDD is nowhere near as big as Terra, whose UST and Luna tokens reached a combined value of $60 billion at their peak. It would therefore be unlikely to have the same effect if it collapsed, according to analysts.
“USDD doesn’t have the weight to cause the same wave of destruction that UST did,” Teander said, adding that USDD’s use isn’t nearly as widespread as UST was before its demise.
According to public blockchain records, around 10,000 accounts hold the token on the Tron network, while just over 100 accounts hold it on Ethereum.
Should USDD collapse, “it would not result in the same level of contagion or fear as the UST/LUNA collapse,” Hussain said.
And unlike UST, which was only partially collateralized by crypto, USDD seeks over-collateralization, meaning its assets always exceed the number of tokens in circulation.
Tron DAO Reserve, Sun’s fund, says its reserve holds more than $1.9 billion in Bitcoin and other tokens, including stablecoins USDC and Tether. USDD has an offer of around $700 million. That reduces the likelihood of a Terra-style collapse, according to Teander.