Improving USDD From Lessons Learned
Decentralized stablecoins are hard. But despite the events of the past few weeks, we still believe in their potential.
We came up with the idea for USDD after witnessing Terra’s dramatic ascent. At its peak, circulating UST supply eclipsed all decentralized competitors by almost 2x. On the surface, Terra appeared to have won the stablecoin war, but behind the curtain, UST was still at extreme risk. Despite the Luna Foundation Guard’s best efforts, a majority of UST’s collateral consisted of LUNA, a highly volatile asset, and less than 15% of UST was collateralized by Bitcoin. We witnessed the consequences of these missteps over the last two weeks. After thinking through the challenges UST faced and learning from them, we set out to build a better decentralized stablecoin.
Unlike Terra, the TRON blockchain hosts the largest trading USDT supply of any blockchain globally. TRON has the largest supply of fiat-backed stablecoins issued on-chain, and we’ve achieved enormous success and adoption in our DeFi ecosystem, helped by our focus on stablecoin liquidity and adoption.
USDT Supply by Blockchain. TRON exceeds Ethereum in USDT issued. Source: The Block
Built on the back of TRON’s thriving stablecoin ecosystem, USDD will be a new decentralized stablecoin fully backed by a combination of stable and volatile assets. Initially, USDD will be over-collateralized by high-quality and low-volatility assets, including USDT, USDC, and BTC. The collateralization rate is currently in the 180-200% range. By increasing the USDD supply slowly, we will be cautious with expansion. USDD will allow TRX holders to benefit from its success, while the inherent value of TRX derived from widespread practical use cases will help contain the risk to USDD holders and users. On these principles, we’ve assembled a world-class team consisting of top researchers and developers under the TRON DAO Reserve to deliver on this vision for USDD.
So what is USDD?
USDD is a cryptocurrency pegged to the U.S. dollar. In Phase One (details below) of our launch roadmap, the stablecoin will only be issued and redeemed by whitelisted members of the TRON DAO Reserve (TDR). Issuance and redemption is done via a dynamic exchange between TRX and USDD. This exchange allows users to burn $1 of TRX in exchange for the right to mint 1 USDD. Redemptions work similarly, just in the reverse direction (full details can be found here). This allows USDD to have a responsive monetary policy, as whitelisted TDR members and eventually anyone can stabilize USDD against price fluctuations and consolidate its use as an actual settlement currency.
What’ve we learned from Terra?
1. Inorganic and unsustainable growth is bad.
Terra grew on the backbone of Anchor, a 20% fixed-yield lending protocol that at its peak attracted over $14b in UST deposits. Anchor was the single-handed reason for UST’s explosive growth, but it threw the entire Terra system out of balance. As more and more users looked to profit from Anchor’s attractive yield, UST minting exploded. Anchor deposits grew by nearly 10x in the past year alone. It was this unsustainable growth that led to Terra’s downfall.
Anchor UST deposits over the past year. Anchor’s uncontrolled growth led to its downfall. Source: Anchor
We, on the other hand, plan to take a more sustainable approach to growing the USDD supply. During Phase One (outlined here), we plan to guarantee that all LP stakers on Curve, Ellipsis, SunSwap, SUN.io, JustLend, etc. (the list is growing), as well as users who stake USDD on centralized exchanges, will receive a fixed 30% APR on their deposits in exchange for providing liquidity on the aforementioned platforms. However, this phase will be capped, with a maximum of 2b USDD mintable.
This 2b USDD supply cap will be lifted in Phase Two after a time-based staking mechanism. In this phase, lenders and stakers who pledge to lock USDD liquidity on decentralized exchanges for 1-year will continue to receive high yield, while users who prefer to keep their tokens locked for a shorter period of time will receive a lower rate. The cap for USDD long-term will be determined by trading demand for the token on centralized and decentralized exchanges, as we want USDD to be a settlement currency for other asset trading pairs. Liquidity is a paramount feature and we want to compensate early adopters with ample yield for the liquidity they provide. Ultimately, the cap on USDD supply will be tied to the total volume of USDD traded. We believe in ensuring ample utility for USDD by maximizing its turnover/velocity while minimizing systematic risk by limiting initial supply growth.
2. Transparent over-collateralization is critical to preventing depegging.
Terraform Labs established the Luna Foundation Guard (LFG) to diversify UST’s collateral and prevent depegging events. But this attempt was too little, too late. The reserve consisted of just $3b of BTC at its peak, hardly enough to collateralize the nearly 19b+ UST supply. During the bank-run over the last two weeks, LFG’s collateral barely made a dent in the overwhelming UST sell pressure.
The TRON DAO Reserve plans to ensure USDD is always over-collateralized by a basket of fiat-collateralized stablecoins (e.g., USDT and USDC) as well as Bitcoin and TRON, among other assets. We have already devoted over $550m of assets to the reserve, and plan to continue this as the USDD supply grows. We plan to transparently display all collateral on the TRON DAO Reserve Website soon. Other than the equivalent amount of TRX burnt as hard-back for the total circulating USDD issued to-date, the reserve currently maintains approximately $295m USDT, $82m BTC, and $181m TRX. The TRON DAO Reserve plans to continue committing capital to the reserve as the supply of USDD grows and will target a $2b reserve by the end of Phase One, with plans to commit up to $10b total to support the project long-term.
USDD as the Settlement Currency for Crypto
To help drive utilitarian adoption for USDD, the TRON DAO Reserve plans to focus efforts on developing utility for USDD across the crypto market. Short-term, the TRON DAO Reserve will denominate more liquid trading pairs in DeFi and CeFi against USDD. In DeFi, we plan to ensure all heavily traded on-chain assets have high USDD-denominated liquidity on AMMs. In CeFi, we will partner with several centralized exchanges including Huobi, KuCoin, Poloniex, Bybit and many others to offer rebates to customers who trade asset pairs against USDD. Our aim is for USDD trading pairs to have more liquidity than USDT or USDC on both centralized and decentralized exchanges.
We want USDD to be the new settlement currency of crypto. To enable this, we will focus on liquidity, while making sure USDD has ample reserves.
As the industry moves closer to a cross-chain future, USDD will also expand to support multiple chains. We’re currently active on TRON, BNB Chain, and Ethereum, with plans to expand to many others in the near future.
Justin Sun May 31, 2022