Justin Sun, the founder of TRON, tweeted in April about the launch of the brand-new stablecoin on the TRON blockchain, USDD (or Decentralized USD), marking its official entry into the field of decentralized stablecoin.
As an algorithmic stablecoin, USDD is comparable to UST, the Terra stablecoin that, up until the beginning of May, was the biggest of its kind. Considering how fresh it is, it could seem intimidating to think about investing in the TRON stablecoin. We’ll discover more about USDD in this blog, including how it works and whether you should invest in it or not.
Are you all set to get this party started? Let’s go!
Before meeting USDD, let’s have a quick catch-up with algorithmic stablecoin.
What are algorithmic stablecoins?
Cryptocurrencies known as stablecoins are intended to maintain a specific value in relation to another asset, usually a fiat currency like the US dollar. Investors and traders frequently use stablecoins to stay in the crypto market while hedging against price volatility since they are tied to an expected and stable value. In addition, most stablecoins try to establish their peg utilizing a collateral mechanism of some kind.
Algorithmic stablecoins are different. In their most basic form, algorithmic stablecoins are fully uncollateralized. They have no outside asset to support their worth. Instead, they employ algorithms, which are detailed guidelines or instructions that must be followed for a given outcome (usually by a computer). These algorithms are designed to reward market participants’ behavior and/or alter the amount of coins in circulation, causing the price of any particular currency to, in theory, settle around the peg.
AMPL, BAC, USDD, UXD, and UST are some well-known algorithmic stablecoins. We’ll learn about USDD in this blog.
Introduction to USDD stablecoin
On May 5, 2022, TRON stablecoin and digital asset USDD went live on Ethereum and TRON. The creator of TRON, Justin Sun, asserted that USDD would provide investors with a 30% annual percentage yield. Furthermore, it is maintained at a 1:1 ratio to the US dollar, which means that 1 USDD is always expected to be equal to $1. This means that USDD retains its value at a fixed exchange rate to the US dollar.
Because both USDD and UST are algorithmic stablecoins, which maintain price stability using algorithms and smart contracts that can control the number of tokens in circulation, USDD has historically been equated to UST.
Once the price falls below its desired level, the algorithmic stablecoin system reduces the total number of tokens available. Conversely, more tokens will be made available if the token’s price rises above the desired level to cause the stablecoin’s value to fall to the desired level. The major purpose of using an algorithmic stablecoin is to have better control over a coin’s supply and demand.
How does USDD work?
Without getting into the specifics, the USDD stablecoin essentially pledges the following to keep its parity with the US dollar:
When the price surges beyond the peg
Consider a situation where there is more demand than supply for USD. Then, as a result of market dynamics, the price will exceed $1.
The USDD protocol allows users to temporarily exchange $1 worth of TRX for 1 USDD to return the price to $1. TRX worth $1 is burned in this trade, and 1 USDD is created. The increase in USDD supply resulting from more users doing these swaps causes the price to stabilize at $1 per token.
It should be noted that consumers are motivated to engage actively in the process. This is because these TRX-to-USDD swaps provide consumers with an opportunity to profit from arbitrage.
For instance, if the USDD price increases to $1, the new USDD you created by exchanging $1 worth of TRX will likewise be valued at $1.1 on a market outside of the network. Then, by selling that USDD, you may generate a profit of ($1.1 – $1.0 =) $0.1. This may not seem very much, but if done frequently, the earnings can increase significantly.
When the price drops below the peg
Similarly, if the USDD price falls below $1 (let’s say to $0.9), you may purchase 1 USDD on the open market for just $0.9. Then, under the protocol, you may exchange 1 USDD for 1 TRX. Each exchange causes 1 USDD to be burned in the system, which lowers the amount of USDD in circulation.
As more users switch from USDD to TRX, the supply finally declines. The price then returns to the desired level, which is $1, as a result.
Regarding the rewards for taking part in the process, you might now sell your $1 worth of TRX on a public market to earn ($1- $0.9 =) $0.1 every swap.
You now have the knowledge necessary to decide whether the USDD stablecoin is ideal for you and your crypto portfolio since you better understand what USDD is. Despite being a relatively new stablecoin, it has certain unique benefits that might prove valuable in the future. The USDD stablecoin and the UST stablecoin are both algorithmic coins. This can be the foundation of your USDD investments if you know how to use UST appropriately.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.