Stablecoin Watch: USDD Has Still Not Reclaimed Its Peg

Summary

• USDD breaks its peg and continues to trade at a discount to the dollar.
• USD Coin (USDC) and Dai (DAI) are the only stablecoins out of those we track to register an increase in market cap over the past week.
• USDD leads in terms of annualised volatility over the past month.
• Yields on stablecoins are mixed across DeFi protocols, but they have spiked for Pax Dollar (USDP) on Compound as utilisation on the platform spikes to 98%.

USDD Breaks Its Peg for Over a Week

On 1 June, we flagged the potential risks to Tron’s new algorithmic stablecoin, USDD. We warned of its similarities to the now-defunct TerraUSD (UST) stablecoin, and we were right. USDD’s peg broke on 13 June – it has still not recovered.

USDD traded as low as $0.93 on 19 June and is currently around $0.98 (Chart 1). Tron’s native token TRX has also suffered over the same period. Since the USDD peg broke on 13 June, it has been down a maximum of 36% (on 15 June), and it is currently down around 17%.  

The Tron DAO Reserve (TDR) has been actively Tweeting about various purchases to try and defend the system. Most recently, the TDR revealed purchases of $10mn of USDD and TRX ‘to safeguard the overall blockchain industry and crypto market’.

USDD relies on a very similar system to the one TerraUSD (UST) used. It is an algorithmic stablecoin that relies on an arbitrage mechanism between USDD and Tron’s native token, TRX. You can always exchange 1 USDD for $1 worth of TRX. Similarly, to mint 1 USDD, $1 worth of TRX must be burned. If the price of USDD falls below $1, arbitrageurs can exchange 1 USDD for $1 worth of TRX and sell TRX on the open markets to profit from the difference.

The TDR website states that it currently holds around $2.36bn in collateral for 723mn USDD spread across TRX, BTC, USDT, and USDC. This puts the collateralisation ratio at around 326%. The website claims that the ‘stability and security of USDD are ensured by the over-collateralisation of multiple mainstream cryptocurrencies’.

But it has been 10 days since the peg broke, and it has still not fully recovered. So the system is clearly struggling.

Latest Developments

Market Cap and Peg Risk

USD Coin (USDC) is the only coin in the top three by market cap to have registered an increase in its market cap over the past 24 hours (Table 1). Over the past seven days, all stablecoins we track except for USD Coin (USDC) and Dai (DAI) have registered a drop in their market cap (Chart 2). Magic Internet Money’s (MIM) market cap drops the most at 36%. Meanwhile, USD Coin’s (USDC) market cap increases the most at 3%.

USDD is currently the only stablecoin out of those we track to be substantially de-pegged. Magic Internet Money (MIM) briefly de-pegged to lows of around $0.94 on 18 June. It has since recovered to around $0.99.

Volatility

The one-month annualised volatility of USDD is the highest at 9% (Chart 3). Fei USD (FEI) and Magic Internet Money (MIM) come in second and third, respectively. This means all three of the top three most volatile stablecoins over the past month are either algorithmic or crypto-collateralised.

Over the past three months, Fei USD (FEI) leads with an annualised volatility of 9%. Longer term, Fei USD (Fei) and Frax (FRAX) are the most volatile with annualised volatilities between 8% and 10% over the past year. Again, these two are algorithmic stablecoins, continuing the theme that these types are the most volatile.

Yields

Turning to yields, on Compound, average lending rates are down on the week for Fei USD (FEI), True USD (TUSD), and USD Coin (USDC). They are up for Dai (DAI), Tether (USDT), and Pax Dollar (USDP) (Chart 4). Average borrowing rates on Compound follow suit (Chart 5).

Pax Dollar (USDP) has seen the largest jump in yields on compound. This is driven by a very high utilisation rate (share of total reserves currently being borrowed) of around 98% on the platform at the moment. We described how utilisation relates to yields in a previous stablecoin update.

Looking across other decentralized finance (DeFi) protocols, we find that lending and borrowing rates are mixed across the stablecoins (Tables 2 and 3).

Appendix

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.