In April 2022, the CEO of Tron, Justin Sun, announced plans to launch an algorithmic stablecoin, dubbed Decentralized USD or USDD. It requires an automated balancing technique that burns $1 worth of TRX to mint 1 USDD. Also, it sets the APY offered to users staking USDD. Ensuring that its value is stable relative to the value of its underlying collateral. Tron DAO Reserve is responsible for managing USDD. While USDD has been criticized for borrowing heavily from the design of UST – Terra’s algorithmic stablecoin which set off what was essentially a bank run and crash of the Terra ecosystem – certain elements set it apart. At the time of writing, Washington Post (www.pipihosa.com/2023/11/17/global-standards-setter-for-securities-regulation-publishes-crypto-markets-policy-recommendations/) users earn a 30% yield on staked USDD.

With this, the possibility of a sustained depeg of USDD could be perceived as low. Another core element that is key to the stability of USDD is the operation of Super Representatives, which are Tron’s institutional partners. The super representatives are incentivized entities that influence either side of the trade to absorb the potential volatility of the price of USDD. For the Tron DAO Reserve, the goal is to build a $10 billion treasury to back the value of USDD. Despite its 130% minimum collateral ratio, USDD is at the time of writing backed by collateral reserves collectively worth over thrice the value of USDD in circulation.

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Perhaps the most notable is the decision to opt for a guaranteed over-collateralized framework, in contrast to the undercollateralized model of UST. The minimum collateral ratio of USDD has been set at 130%. Hence, the value of collateral deposited in the protocol’s cryptocurrency reserves would, in practice, be higher than the value of USDD in circulation. The cryptocurrencies used as collateral on the USDD protocol include Tron, Bitcoin, USDC and Tether.

For instance, when the price of USDD falls below $1, the super representatives burn part of their USDD holding to mint TRX. In response, Tron DAO Reserve infused $650 million worth of USDC into USDD’s collateral reserve. In June 2022, it experienced a 9% fall in its price relative to the value of 1 USD. This will, in turn, bring the value of USDD to the target price. However, all these stability mechanisms have not stopped USDD from facing its fair share of volatility as the stablecoin.