A look at USDD, the stablecoin that Tron’s Justin Sun is trying hard to rescue

Initially, USDD was meant to follow Terra USD's (UST) mint-and-burn mechanism to maintain its 1:1 peg with the US Dollar. However, shortly after USDD was launched, UST spiraled out of control, losing its peg with the greenback and crashing to $0.

This rendered the mint-and-burn mechanism as flawed in the eyes of investors. Moreover, several regulatory bodies came down against the algorithmic stablecoin model, forcing USDD developers to look for another solution.

Eventually, project developers opted for a TRX burning mechanism backed by an over-collateralised reserve of highly liquid digital assets such as BTC, USDT, and TRX. Chosen members of the Tron DAO Reserve have been given the authority to burn Tron's native cryptocurrency, TRX, to create more USDD.

The project also promises to keep the value of collateralised assets significantly higher than USDD's circulating supply, with a minimum ratio of 120 percent, according to the project's whitepaper. This "responsive monetary policy mechanism will allow the ratio to dynamically adjust to maintain stability based on fluctuating reserve asset values and market conditions," the whitepaper adds.

However, even with the revised system and over-collateralised assets, USDD has proven to be unreliable. It has already suffered three major de-pegs since its launch. The first was in June when the stablecoin plunged to $0.93 a month after the UST meltdown. According to Sun, this de-peg resulted from short sellers targeting TRX on Binance. He also pledged $2 billion to fight the short sellers. Shortly after, USDD recovered its $1 valuation.

The next de-peg occurred last month. The collapse of the FTX exchange caused major stablecoins such as Tether (USDT) to suffer minor price fluctuations. While most coins quickly recovered, USDD could not maintain the standard 1:1 peg with the U.S. dollar and dropped to $0.97 on November 11.

Most recently, USDD fell to $0.97 on December 12. It was found that the DeFi protocol Curve, which serves as the liquidity pool for USDD (the CRV Pool), is quite imbalanced. Users on the liquidity pool can trade USDD for other stablecoins such as DAI, USDT, and USDC. It was found that USDD accounted for almost 85 percent of the total assets in the pool. The imbalance pointed out that more investors wanted to sell the coin instead of buying it, which could have decreased prices for USDD.

Following the news of the de-pegging, Justin Sun posted on Twitter that the stablecoin is 200 percent collateralised. He also added a link through which users will be able to check all the details regarding collaterals on the website.

"Deploying more capital" - Justin emulated Do Kwon in his tweet, reassuring users that capital injection was on its way and that USDD was safe. Sun then posted transaction data on Twitter, showing that he swapped more than $570,000 in USDT and $203,000 in USDC in exchange for the USDD stablecoin. He himself put in more than $1 million in the stablecoin.

The capital injection seems to be working, with USDD currently trading at $0.986, up 0.90 percent at the time of writing.

The collapse of another stablecoin could lead to widespread FUD among investors. Not only that, but it would also invite further scrutiny around stablecoins from regulatory bodies worldwide. However, most experts believe that the crash of USDD, while a significant event, would not cause much of a fallout, at least not nearly as much as the collapse of Terra.

This is because the combined market capitalisation of LUNA and UST was around $40 billion just before their collapse. TRX and USDD have a combined market capitalisation of just under $5 billion. Moreover, there are only 705 active USDD users on the network and less than 100 active users on Ethereum.

If USDD were to collapse, "it would not result in the same degree of contagion, or fear, as when UST/LUNA crashed," said the Head of Financial Research at Fitch Ratings, Monsur Hussain, to CNBC.

For a stablecoin released in the middle of a crypto winter and just days before the UST meltdown, USDD seemed to have been doing quite well. However, a spree of de-pegs has weakened investor confidence. Fortunately, USDD's collateral assets are supposedly valued at $1.45 billion, which far outweighs its current market cap of $707 million. This should drastically reduce the odds of a Terra-style collapse.