Another stablecoin algorithm fell below $ 1 – Could it have the same impact as terraUSD?

A controversial stablecoin created just before the collapse of a similar terraUSD called struggling to maintain its connection to the one dollar. notes CNBC.

The USDD, an “algorithmic” stablecoin that is always destined to be worth $ 1, fell to 93 cents on Sunday. The creator of the currency has amassed a stock of Bitcoin and other cryptocurrencies worth nearly $ 2 billion to provide a “cushion” of security in case investors leave en masse.

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

Dustin Teander, an analyst at Messari, said the fall in the USDD was due to volatility in the cryptocurrency market.

“When people need capital during volatile periods, they have to leave certain positions quickly,” he said.

“With significant outflows from the USDD as well as speculative sales, the result is a deviation from the bond against a dollar in the short term,” he said.

But despite concerns about a repeat of Terra’s history, experts say this is unlikely to happen, as the USDD is much smaller in size and has little acceptance by cryptocurrency investors.

What is the USDD?

The USDD was formed in early May, just days before the UST began to fall below $ 1.

Instead of sitting on piles of cash and other assets, the USDD runs a sophisticated algorithm – combined with a related token called tron ​​- to maintain a one-to-one connection to the dollar.

If this sounds familiar, it’s because Terra’s UST worked the same way.

Another similarity that the USDD shares with the UST is that it has amassed a significant pool of other digital tokens to help raise its price in the event that investors withdraw en masse. Terra bought billions of dollars worth of cryptocurrencies in an effort to keep its stablecoin alive, a move that ultimately proved futile.

The use of cryptocurrencies by the USDD as a reserve exposes it to “similar risks to the UST,” said Monsur Hussain, chief financial officer of Fitch Ratings.

The USDD also offers investors unusually high interest rates – up to 39% – on their USDD deposits. Anchor, a crypto lending platform, similarly advertised yields of up to 20% on UST deposits, a percentage that many investors now say is unsustainable.

The coin was created by Justin Sun, the cryptocurrency businessman behind Tron, a blockchain trying to compete with Ethereum. Like Do Kwon, the founder of Terra, Sun has often used Twitter to promote his projects.

The Chinese-born businessman has been embroiled in many controversies in the past. In 2019, he paid $ 4.6 million to dine with Berkshire Hathaway CEO Warren Buffett, only to cancel it later. The meal finally took place in 2020.

The Tron DAO Reserve, a fund set up by the Sun, said some degree of volatility in the USDD price was expected given its “decentralized” nature.

“Some degree of instability is inevitable,” the agency said on Twitter. “Currently, the market volatility rate is within + – 3%, an acceptable range. We will monitor the market very closely and act accordingly.”

Not another Terra

On closer inspection, however, it is clear that there are some notable differences between the USDD and the UST.

Initially, the USDD is by no means close to the Terra scale, whose UST and luna tokens reached a combined market capitalization of $ 60 billion at their peak. Therefore, it would be unlikely to have the same impact if it collapsed, according to analysts.

“The USDD does not have the weight to cause the same impact as the UST,” Teander said, adding that the use of the USDD was not as widespread as it was before the UST collapsed.

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

If the USDD collapsed, “it would not have the same impact as when the UST / LUNA collapsed,” Hussain said.

And unlike the UST, which was only partially secured by cryptocurrencies, the USDD aims to be over-covered, which means that its assets always exceed the number of tokens in circulation.

The Tron DAO Reserve said its reserve contained more than $ 1.9 billion in Bitcoin and other tokens, including stablecoins USDC and tether. The USDD has a stock of about $ 700 million. This reduces the chance of a Terra-type collapse, according to Teander.