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Why another stablecoin loses its binding – it’s not “Terra 2.0”

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

Umit Turhan Koskun Nurphoto via Getty Images

The controversial stablecoin, launched just before the collapse of a similar token called terraUSD, is struggling to maintain its peg to the US dollar.

The USDD, the so-called “algorithmic” stablecoin, which should always cost $ 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 buffer in case of massive investor flight.

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

Reserve Tron DAO, which controls and manages the stablecoin, said that to some extent the volatility of the USDD price should be expected given its “decentralized” nature.

“A certain% volatility is inevitable,” the organization tweeted last week. “Currently, market volatility is in the range of + – 3%, an acceptable range. We will monitor the market very closely and act accordingly. “

On Wednesday, the USDD traded at around 97 cents.

Despite concerns about a repeat of the Terra saga, experts say it is unlikely to be because the USDD is much smaller in size and has hardly admired crypto-investors.

What is USDD?

The USDD was launched in early May, days before the UST began falling below $ 1. Over the past week, it has been constantly trading below the expected peg to the dollar amid rising sales.

Instead of sitting on piles of cash and other monetary assets, USDD is launching a sophisticated algorithm – coupled with a related token called tron ​​- to maintain pegging to each other against the dollar.

If this sounds familiar, it’s because UST Terra acted in much the same way, creating and destroying UST units and a related coin called luna to circumvent the need to have reserves to support stablecoin.

Another similarity between the USDD and the UST is that it has amassed a significant cache of other digital tokens to help raise its price in the event that investors retreat en masse. Terra bought the crypto for billions of dollars in an effort to keep her stablecoin afloat, and the move ultimately proved futile.

Using the USDD crypto as a reserve exposes it to “similar risks as UST,” said Monsour Hussein, senior director of financial institutions at Fitch Ratings.

“The crypt is usually correlated with the cost during shocks,” he added.

USDD also offers investors unusually high interest rates – up to 39% – on their US dollar deposits. Anchor, a platform for crypto-lending, similarly advertised a yield of up to 20% on UST Holdings, a rate that many investors now consider obscene.

The coin was created by Justin San, an open crypto-entrepreneur behind Tron, a blockchain trying to compete with Ethereum. Like Do Kwon, the founder of Terra, San has often used Twitter to promote his projects – and challenging critics.

In the past, a businessman of Chinese descent has been involved in numerous debates and publicity stunts. In 2019, he paid $ 4.6 million to have lunch with Berkshire Hathaway CEO Warren Buffett, but then abruptly canceled. Lunch finally took place in 2020.

Not another Tera

However, a closer look reveals that there are some notable differences between the USDD and the UST.

First, the USDD did not come close to the scale of Terra, whose tokens UST and luna reached a total value of $ 60 billion at its height. Therefore, according to analysts, it is unlikely to have the same effect if it collapsed.

“USDD doesn’t have the weight to cause the same destruction that UST did,” said Dustin Theander, a crypto data analyst at Messari.

He added that the use of the USDD was not as widespread as the UST until its demise.

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

If the USDD collapsed, “it would not lead to the same degree of contagion or fear as with the collapse of the UST / LUNA,” Hussein said.

And unlike UST, which was only partially secured by crypto, USDD tends to be excessive, meaning its assets always exceed the number of tokens in circulation.

Tron DAO Reserve says its reserve contains more than $ 1.9 billion in bitcoins and other tokens, including USDC and Tether stablecoins. USDD has a reserve of approximately $ 700 million. This reduces the likelihood of a Terra-style collapse, according to Teander.

Why another stablecoin loses its binding – it’s not “Terra 2.0”

Source link Why another stablecoin loses its binding – it’s not “Terra 2.0”

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