TRON’s assertions of USDD over-collateralization may contain hidden worms

This means that TRON DAO's USDD stablecoin is now collateralized by more than 200%. However, a crypto researcher thinks that the allegations may be overblown.

As Terra-ecosystem LUNA's began to crumble in early May, skepticism for algorithmic stablecoins grew.

Some other algorithmic stablecoins are now preparing themselves for the growing skepticism by implementing operational design improvements to calm it. Stablecoins, on the other hand, are attempting to avoid the problems that TerraUSD has encountered (UST).

TRON reported on June 5 that their USD stablecoin is 218 percent overcollateralized. At all times, Tron ensured that there would be a minimum of 130 percent collateral. There are presently $835.9 million in Bitcoin (BTC), Tether (USDT), and TRON's TRX token reserves in the TRON DAO at this time.

TRON founder Justin Sun said in the announcement:

“Spearheading the Stablecoin 3.0 era, the upgraded, over-collateralized USDD will add more diversified features to underpin its stability. The $10 billion reserves pledged by the TDR will enable USDD to become the most reliable decentralized stablecoin with the highest collateral ratio in blockchain history. Currently, the 200%+ collateral ratio offers USDD a very strong safety net.”

While this may look reassuring to investors, a Proximity Labs executive with the Twitter handle'resdegen' has pointed out a catastrophic weakness. Proximity Labs is a company specializing in research and development for the Near Protocol.

resdegen asserts in a Twitter thread that TRON's allegation that USDD is over-collateralized by more than 200 percent is "technically FALSE."

The collateral ratio of a stablecoin is the ratio of the collateral to the stablecoins that have been issued. The collateral ratio of USD can be computed as follows:

[USDD collateral (reserves) / USD supply in circulation]*100 = [835.9 million/ 667 million]*100 = 125.32 percent

How did TRON determine that the USD is overcollateralized by more than 200 percent? In his thread, resdegen delved into this topic. He wrote in justification:

Similar to the UST stablecoin, USDD can be created by burning TRX (LUNA in the case of UST). The TRX tokens that were burned to create USDD are being counted as collateral backing the USDD supply. Mathematical evidence also supports resdegen's claims.

[USDT reserves plus burned TRX / total USD supply]*100= [835.9 million + 667 million / 667 million]*100 = 225 percent

At the time of writing, the result corresponds to the collateral ratio stated on the website of the TRON DAO Reserve. resdegen observes that if the price of TRX begins to decline, the USD could be in danger.

The risk is exacerbated by the fact that TRX is one of the collateral currencies backing USD, as stated by resdegen. He penned:

He noted comparisons with the UST's collateral scheme, which included LUNA among other cryptocurrencies.

TRON's reserves consisted of $440,9 million worth of Bitcoin, $240 million worth of USDT, and $157,4 million worth of TRX at the time of writing. These statistics indicate that more than 18 percent of the TRON Reserves consist of TRX.

According to resdegen, however, the genuine collateral ratio of USDD should be computed without taking into account both the TRX in reserves and the TRX that has been burned. If the collateral ratio is determined without the TRX reserves, USDD will be around 81% collateralized at the time of publication.

TRX should not be included in reserve estimates, as its price is fundamentally dependent on USDD sustaining its peg. He elaborated:

Resdegen is sounding the alarm against USDD by mocking the similarities with Terra tokenomics, in which UST's maintenance of peg relies on the rising price of LUNA.

The ecosystem may not accept the case for eliminating TRX from TRON's Reserves in its whole. However, resdegen may be correct that including tokens earmarked for destruction in the calculation of USDD's collateral ratio may be misleading.

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