Deep Dive on USDD (Decentralized USD)
CMC Research

Deep Dive on USDD (Decentralized USD)

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2 months ago

A comprehensive analysis on USDD (Decentralized USD), launched by TRON DAO Reserve in partnership with top-tier blockchain institutions, and available on TRON, Ethereum and BNB Chain.

Deep Dive on USDD (Decentralized USD)

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Overview of Stablecoin Sector

The crypto space is well known for its volatility, especially as a nascent industry. In the early days, markets put in high double-digit percentage moves on a daily basis. This created a demand for stable assets which users could trade into — assets that were pegged to a stable value such as the U.S. dollar.

The first stablecoin in the crypto space was BitUSD, a stablecoin backed by BitShares (BTS), the native token of the BitShares blockchain, a project backed by now Cardano founder, Charles Hoskinson and EOS founder, Dan Larimer. It launched in early 2014, allowing users to mint BitUSD by providing BitShares as collateral and for BitUSD holders to redeem $1 worth of BitUSD for $1 worth in BitShares. However, due to a lack of a price stability mechanism and the lack of an actual peg to one U.S. dollar, the stablecoin quickly lost peg and quickly fell out of relevance with only about 40,000 in BitUSD in circulation at its peak.

BitUSD was more of just an experiment in the concept of stablecoins, but it opened the door for the many new stablecoins which followed. Learning from the mistakes of BitUSD, Nubits was released, backed by Bitcoin rather than an easily manipulated, low liquidity token like BitShares. However, the high volatility of Bitcoin eventually sent Nubits into a death spiral too, quickly retiring the stablecoin. Later in that same year, Tether launched the now largest stablecoin by market capitalization, USDT. USDT was the first fiat-backed stablecoin, where each USDT token was minted by depositing one U.S. dollar with Tether and redemption burnt 1 USDT token for 1 U.S. Dollar.

The stability and confidence in the fiat-backed stablecoin model proved to be highly attractive, with fiat-backed stablecoins taking up the majority of the market share in the stablecoin scene. Today, the top two stablecoins, Tether’s USDT and Circle’s USDC, take up a combined USD 122 billion in market capitalization, which is just over 90% of the total stablecoin market capitalization.

Despite their success, new and aspiring stablecoin projects continue to emerge, seeking to improve on the decentralization of stablecoins or the capital efficiency of stablecoin models. One of the most successful decentralized stablecoins is DAI, a stablecoin launched by MakerDAO in 2017. Initially designed to be collateralized purely by ETH with a collateralization ratio of between 110-200%, the protocol later shifted to accept new collateral types based on governance votes by MKR holders. Today, DAI is largely backed by ETH, USDC and real-world assets such as U.S. Treasury Bills, which has since sparked criticism of centralization from decentralization purists.

Today, despite having more than 100 different stablecoins on the market, the majority of market share is held in the top two, USDT and USDC, which are both centralized, fiat-backed stablecoins. This has led to many large players in the space calling for the need for more decentralized options, in line with the original ethos of crypto.

Source: https://www.theblock.co/data/stablecoins/usd-pegged/total-stablecoin-supply

Spearheaded by TRON founder, Justin Sun, and the TRON DAO, USDD (Decentralized USD) seeks to be the decentralized stablecoin for the crypto space, with a stable, tamper-proof, decentralized and freeze-free stablecoin system.

What Is USDD (Decentralized USD)?

USDD (Decentralized USD) was launched in May 2022 by TRON DAO Reserve, in partnership with various top-tier blockchain institutions. USDD was first launched on three Layer-1 blockchains simultaneously, TRON, Ethereum and BNB Chain.

USDD is an over-collateralized decentralized stablecoin, designed to offer a stable value to its users by being pegged to the U.S. dollar at a 1:1 ratio. USDD aims to provide users with a digital currency that can be used for various transactions while minimizing the price volatility commonly associated with cryptocurrencies. USDD has a minimum collateralization ratio of 120% and is backed by a basket of crypto assets including BTC, TRX, USDT and more

USDD (Decentralized USD) Market Capitalization

Today, USDD has achieved a circulating supply of over 725 million tokens, with a total authorized issuance of up to 2 billion tokens.

USDD sees an average daily trading volume of approximately $10.4 million, with the majority of its volume trading against other popular stablecoins or large-cap cryptocurrencies from the TRON ecosystem.

Key Features of USDD

Multi-Chain

USDD was initially launched on TRON, Ethereum and BNB Chain with BitTorrent Chain’s support as an interoperability layer to facilitate seamless transfers of USDD across the three chains. However, it has expanded support to seven additional chains since, including Avalanche, Fantom, Polygon, Arbitrum, Aptos, Aurora, and Optimism. Users can easily bridge USDD across different chains via cross-chain bridges such as Stargate Finance, Symbiosis, Debridge and more.

Fast Transaction Speeds

Built on the TRON network, USDD benefits from high-speed transactions and the robust security of the Layer-1 blockchain.

Decentralized

As a decentralized stablecoin, minting, redemption and management of USDD do not require the intervention or approval of any centralized entities, ensuring a tamper-proof, freeze-free and decentralized stablecoin system.

Over-Collateralized

USDD is secured by the over-collateralization of multiple digital assets such as TRX, BTC, and USDT. The total value of collateralized assets is significantly higher than that of USDD in circulation with the collateralization ratio at 204.5% at the time of writing this report. This is well above the minimum collateralization ratio of 120%. A high collateralization ratio is put in place to counter depeg risk resulting from the volatility of the crypto markets, especially in the tokens that form the collateral pool.

Compared against other stablecoins, USDD has one of the highest collateralization ratios of any stablecoin on the market.

How Does USDD (Decentralized USD) Work?

Currently, USDD minting using TRX can only be executed by the seven current members of the TRON DAO Reserve. This includes exchanges such as Poloniex, Amber Group, Ankr, Mirana Ventures, Multichain Capital, FalconX and TPS Capital. TRON DAO Reserve and its members (whitelisted institutions) issue the USDD by staking TRX, the TDR members deposit TRX into the TRX Burning Contract, which triggers a release of an equivalent dollar value in USDD to the Circulating Account which transfers the USDD to the respective member.

Users who are not part of the TRON DAO Reserve can only mint and redeem USDD via the Peg Stability Module (PSM), using accepted stablecoins such as USDC, USDT, TUSD or USDJ.

Peg Stability Module

The Peg Stability Module (PSM) is a swap tool launched by the TRON DAO Reserve, with the goal of maintaining the stability of USDD. Users can swap between USDD and other stablecoins at a 1:1 ratio with no slippage, thereby supporting the peg of USDD to other stablecoins and to the U.S. Dollar.

TRON DAO Reserve

The stability of USDD is maintained by the TRON DAO Reserve through a series of monetary policies based on market conditions, namely, setting of interest rates, open market operations, window guidance and the PSM.

TRON DAO Reserve has partnered up with several top-tier blockchain institutions and protocols to help set the interest rate for USDD, similar to how central banks of countries utilize interest rates to influence supply and demand for their respective currencies. TRON DAO Reserve sees the TRON ecosystem as a growing one, similar to that of emerging economies. As such, higher interest rates are implemented to attract capital into the ecosystem to incentivize USDD adoption. The USDD interest rate was set at 30% at launch, but has since been reduced with increased adoption of the stablecoin.

Open market operations refer to the open buying and selling of USDD and its collateral assets. Beyond using such operations to maintain the stability of USDD, this also helps to positively influence public perception as such operations are publicly announced when executed. It is key to note that such operations are not conducted with the aim of profiting from trades and all profits will be funneled to the reserves for ecosystem development or maintenance of USDD price stability. This has also been compared to the way central banks adjust monetary supply through secondary purchases and sales of bonds using their respective currencies.

Window guidance is the process of cracking down on supply of USDD being lent out on partner DeFi protocols, such as JustLend, or centralized exchanges (CEXs), during periods of market volatility. This can be done by limiting USDD lent out or completely pausing the feature on their respective platforms. This is done to reduce the supply available for malicious short-sellers who wish to depeg USDD for their own profit.

Finally, the PSM enables 1:1 swaps of USDD with other stablecoins such as USDT and USDC, which further supports the $1 peg of USDD. The TRON DAO Reserve plays a crucial role in maintaining the PSM's liquidity, supporting seamless trades between USDD and the other supported stablecoins to ensure smooth market operations and USDD price stability.

USDD Available Markets

USDD is currently available on a wide range of exchanges and decentralized applications. Centralized exchanges that offer USDD include HTX, Poloniex, Bybit, Kucoin and more. Beyond centralized institutions, decentralized exchanges (DEXs) such as Uniswap, PancakeSwap, Sunswap and many others also offer USDD as part of their offerings.

To further real-world adoption, USDD has also partnered up with a handful of payment providers including Alchemy Pay, FatPay, NOWPayments and more.

Future Outlook for USDD

Today, USDD stands as the sixth largest stablecoin by market capitalization, less than two years after its launch in the 2022 bear market.

USDD facilitates seamless global trade and transactions with its inherent price stability and the strong backers that form the TRON DAO Reserve who work to maintain it. In fact, USDD has also been granted statutory status as an authorized digital currency and medium of exchange in the Commonwealth of Dominica as of Oct. 7, 2022.

With the support of the BitTorrent Chain and multiple cross-chain bridging protocols, USDD has gone beyond its original deployment on three chains to integrate several new blockchains, furthering its accessibility to the masses for a variety of use cases in the payments and DeFi space.

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