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TRON’s claims of USDD over-collateralization may have hidden worms

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In early May, the collapse of the Terra-LUNA ecosystem caused a wave of mistrust towards algorithmic stablecoins in general.

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Given the mistrust, other algorithmic stablecoins are now arming themselves, making changes to their operating schemes to quell growing doubts. But more importantly, stablecoins are trying to avoid the problems that TerraUSD (UST) is facing.

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June 5 TRON announced that his stablecoin USDD is overcollateralized at 218%. In addition, Tron has always guaranteed a minimum margin ratio of 130%. The TRON DAO currently shows reserves of $835.9 million, consisting of Bitcoin (BTC), Tether (USDT) and the TRON TRX token.

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TRON founder Justin Sun said in the announcement:

“Leading the Stablecoin 3.0 era, the updated overcollateralized USDD will add more diversified features to maintain its stability. The $10 billion in reserves promised by TDR will enable USDD to become the most trusted decentralized stablecoin with the highest collateral ratio in blockchain history. Currently, a margin ratio of 200%+ offers USDD a very strong safety net.”

While this may sound encouraging to investors, a Proximity Labs executive pointed out a fatal error that uses the Twitter handle “resdegen”. Proximity Labs is a research and development firm working on the Near protocol.

AT Thread on Twitterresdegen claims that TRON’s claim that USDD is over 200% overcollateralized is “technically FALSE”.

In simple terms, the stablecoin collateral ratio is the ratio of collateral to issued stablecoins. Therefore, the USDD collateral ratio can be calculated as follows:

[USDD collateral (reserves)/ total supply of USDD]*100 = [835.9 million/ 667 million]*100 = 125.32%

So how did TRON come to the conclusion that USDD is over 200% overcollateralized? Here’s what Resdegen dug into his thread. He wrote in explanation:

USDD, like the UST stablecoin, can be minted by burning TRX (LUNA in the case of UST). TRX tokens burned to mint USDD are settled as part of the USDD supply collateral. Mathematics also supports Resdegen’s claims.

[USDD reserves + burnt TRX / total supply of USDD]*100= [835.9 million + 667 million / 667 million]*100 = 225%

The result is equal to the collateral ratio displayed on the TRON DAO reserve website at the time of writing. Resdegen notes that this could be a slippery slope for USDD if the price of TRX starts to fall.

The risk is exacerbated by the fact that TRON has TRX as one of the USDD-backed collateral currencies, Resdegen said. He wrote:

He drew parallels with the UST mechanism, which also had LUNA, among other cryptocurrencies, as collateral.

At the time of writing, TRON reserves consisted of $440.9M worth of Bitcoin, $240M USD and $157.4M TRX. These values ​​show that more than 18% of TRON reserves are made up of TRX.

However, according to Resdegen, USDD’s real collateral ratio should be calculated without taking into account TRX in reserves as well as burned TRX. If the collateral ratio is calculated without TRX reserves, USDD will be collateralized at approximately 81% at press time.

According to Resdegen’s argument, TRX should not be included in the reserve calculation as its price is fundamentally tied to maintaining the USDD peg. He explained:

Ridiculing the similarity to Terra tokenomics, in which the maintenance of the UST peg was dependent on the rise in the price of LUNA, resdegen is sounding the alarm against USDD.

The ecosystem may not fully accept the argument for removing TRX from TRON reserves. However, resdegen may be right that adding burn tokens when calculating the USDD collateral ratio seems to be misleading.

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