- We look at the new stablecoin from Tron, USDD, and asses its similarities to the TerraUSD model.
- Frax (FRAX) and Magic Internet Money (MIM) registered the largest decrease in market cap. USD Coin (USDC) and Binance USD (BUSD) are still the only coins to register increases in market cap.
- FEI remained the most volatile stablecoin out of those that we track.
- Yields on stablecoins continue to fall, in contrast to rising yields in fiat.
Is USDD Doomed to Fail?
After the TerraUSD/Luna collapse, all eyes have been on Tron (TRX) – a multi-purpose smart contract platform launched in 2017 that enables the creation and deployment of decentralised applications (dApps).
Tron has claimed the third largest total value locked (TVL) in decentralised finance (DeFi). Its TVL is currently around $6.2bn. This puts it above Solana and Avalanche which each have around $4bn TVL, and behind Ethereum and Binance which each have around $73bn and $9.1bn TVL, respectively.
Tron’s growth in TVL coincided with the launch of its stablecoin (USDD) on 2 May. Indeed, its TVL explosion has matched that of the market cap of the USDD stablecoin (Charts 1 and 2). The market cap of USDD is currently around $600mn, making it the 9th largest by market cap.
USDD is an algorithmic stablecoin that is governed by smart contracts instead of being backed directly by collateral. The algorithm that controls its dollar-peg is based on an arbitrage trade between USDD and Tron’s native token (TRX). An investor can always swap 1 USDD for $1 worth of TRX. When the USDD price is lower than $1, arbitrageurs can use the discounted USDD to receive $1 worth of TRX. They can then sell the TRX on open markets and profit from the difference. The opposite is true when USDD is above $1.
If this sounds familiar, that is because it is strikingly like the TerraUSD system that eventually collapsed. Moreover, USDD holders can currently receive a yield of around 20% by lending on JustLend – a Tron native lending platform, in the same way that TerraUSD utility was provided by high yields on the Anchor protocol.
The similarities do not stop there. Tron DAO is also apparently seeking to raise $10bn in assets for a reserve in case of financial crisis. This is the same amount the Luna Foundation Guard was aiming to obtain for its reserve (it only raised $3bn, which ultimately failed to save the stablecoin). These similarities raise concerns and speculation on whether USDD can succeed.
Market Cap and Peg Risk
Frax (FRAX) and Magic Internet Money (MIM) have seen their market cap decline most over the past 30 days (Chart 3). We omit USDD from Chart 3 this week since its market cap change is orders of magnitude above the rest at over 1,700%. In general, the stablecoins we track have continued to see their market cap deplete over the past 30 days, except for USD Coin (USDC) and Binance USD (BUSD), which have each registered a 10% and 3% increase in their market cap, respectively.
The one-month annualised volatility of Fei USD (FEI) is now 5% – down 4pp from our last update. Its three-month annualised volatility remains far higher at 16%, around four times the next highest stablecoins, Pax Dollar (USDP) and Magic Internet Money (MIM). Over the past year, Fei USD (FEI), Magic Internet Money (MIM), and Frax (FRAX) stand shoulders above the rest in terms of annualised volatility with values between 10% and 7% across the three.
Turning to yields, both lending rates and borrowing rates on the Compound protocol sit around and below the 2% mark (Charts 3 and 4). Overall, USDT has the highest lending (1.9%) and borrowing rates (3.5%) on Compound, but these have both come down slightly since our last report. Looking across other decentralized finance (DeFi) protocols, we find that lending and borrowing rates are mixed across the stablecoins (Tables 2 and 3).
USDT: Tether is a fiat-collateralised stablecoin primarily issued on the ethereum and bitcoin blockchains. It aims to be pegged 1:1 against the US dollar. Tether’s reserves are not backed 100% by US dollar deposits. Instead, they are backed by reserves that include cash, cash equivalents, short-term deposits, commercial paper, corporate bonds, funds, precious metals, secured loans, and other investments including digital tokens.
USDC: USD Coin is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is 100% backed by cash and short-dated US treasuries. USDC publishes a monthly public attestation of 100% reserves.
BUSD: Binance USD is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is backed 100% by USD held in Paxos-owned US bank accounts and US treasury bills (including through repurchase agreements and/or money-market funds invested in US treasury bills). Paxos is a New-York-regulated financial institution and publishes a monthly public attestation of 100% reserves.
TUSD: TrueUSD is a fiat-collateralised stablecoin issued by the TrustToken platform that is issued as ERC-20 tokens on the ethereum blockchain. It aims to maintain its 1:1 peg against the US dollar by being fully collateralised by US dollars using multiple escrow accounts to reduce counterparty risk.
USDP: Pax Dollar is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It aims to be pegged 1:1 against the US dollar by holding USD reserves in Paxos owned US bank accounts.
DAI: Dai is a crypto-collateralised stablecoin that attempts to maintain a 1:1 peg against the US dollar by depositing other crypto assets into smart contracts on the ethereum blockchain every time a new DAI token is issued. DAI is maintained by a decentralised autonomous organisation (DAO) called MakerDAO. And since the mechanism is maintained by a system of smart contracts, it has higher decentralisation than the centralised entities controlling USDT, USDC, or BUSD.
MIM: Magic Internet Money is a crypto-collateralised stablecoin launched by the DeFi platform Abracadabra. MIM is backed by interest-bearing tokens (ibTKN).
UST: TerraUSD is a crypto-collateralised hybrid stablecoin native to the Terra blockchain. To mint 1 UST, $1 worth of UST’s reserve asset, LUNA, must be burned. The idea was to try and ensure LUNA’s long-term growth. More people buying into UST means more LUNA gets burned, which should make the remaining LUNA supply more valuable. However, the system collapsed recently when UST de-pegged from the US dollar.
FRAX: Frax Finance is a fractional-algorithmic stablecoin that uses both collateralisation and an algorithmic process to create its decentralised stablecoin that is pegged 1:1 to the US dollar. Only stablecoins (currently, USDC) are accepted as collateral by the protocol.
FEI: FEI is an algorithmic stablecoin that aims to be pegged 1:1 against the U.S dollar that is backed mostly by ETH.
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.