I. How to understand USDD’s stability?
1. USDD’s core mission is to provide the blockchain world with a decentralized cryptocurrency of stable value.
2. What is decentralization?
- USDT and USDC, the largest stablecoins at present, are strictly pegged 1:1 to the U.S. dollar reserves of the centralized platforms Tether and Centre. Their use and price stability are thus subject to the credibility and control of centralized organizations: for example, whether the organization has sufficient U.S. dollar reserves and who provides credible real-time attestations. Further, centralized organizations are allowed to freeze the assets in a designated wallet through smart contracts, and users have to pass rigorous KYC verification before they can redeem stablecoins for dollars. USDC and USDT are by nature centralized stablecoins under strict supervision by the relevant U.S. regulatory authority.
- USDD is minted by the whitelisted institutions of the TRON DAO Reserve (TDR) through burning TRX. Its value is backed by the over-collateralization of highly liquid crypto assets under the TDR, including BTC, USDT, USDC, and TRX. The circulation and use of USDD are free from the intervention of any centralized parties. Similar to BTC and ETH, USDD grants its holders full ownership, meaning that no organization or individual has access to freeze users’ USDD.
3. What do we mean by stable value?
- Tether and Centre, which are centralized, are obliged to exchange USDT and USDC for U.S. dollars at a 1:1 ratio upon users’ requests, so the price of one USDT or USDC should theoretically be pegged at $1. When the issuer’s ability to meet such an obligation is challenged by the market, the stablecoin is very likely to lose its $1 peg.
- USDD, given its decentralized nature, is not bound by the duty of redemption in real U.S. dollars as is the case with centralized stablecoin issuers, and its price stability is maintained through a series of monetary policies adopted by the TDR based on market conditions. The price of USDD is not strictly pegged to the U.S. dollar but floats up and down around it. An analogy is the Linked Exchange Rate System (LERS) established to maintain the Hong Kong dollar’s link to the U.S. dollar at the rate of HK$7.8 to one U.S. dollar. In cases where the exchange rate fluctuates within a band of HK$7.75–7.85, Convertibility Undertakings (CUs) of the Hong Kong Monetary Authority will not be triggered.
- In the same vein, USDD is not considered de-pegged to the U.S. dollar when its price swings modestly below or above $1, and therefore the TDR does not need to implement a monetary policy intervention to “re-peg” it. The TDR considers it acceptable when the price of USDD fluctuates within a 3% range (up or down) under extremely volatile market conditions (e.g., since 2015, there have been 15 days when the single-day fluctuation of BTC price overshot 15%, an average of 2 days per year). However, suppose USDD records a significant and unreasonable movement in its price, the TDR will strive to keep its value stable by taking concrete monetary policy interventions as it has been doing in the past two weeks.
- The TDR adopts a linked exchange rate system for USDD, which allows its price to move up and down within a reasonable range instead of having to be strictly pegged 1:1 to the U.S. dollar.
II. Who are suitable holders of USDD?
- Users who wish to completely control their stablecoin without any institution or individual being able to freeze their wallet funds, just like holding BTC and ETH in their personal crypto wallets. Users who wish to have their token value remain stable and free from fluctuations as violent as BTC and ETH may experience, are also suitable for holding USDD.
III. Why has USDD fluctuated significantly in the recent past?
1. The market has mistakenly equated the relation between TRX and USDD to that between Luna and UST.
a. Luna and UST used an arbitrage system to maintain UST’s peg.
- Luna and UST are pegged to $1 by an arbitrage system of burning and minting. UST peg does not rely on the existence of any reserves to support the peg. Users mint 1 UST by depositing 1 USD worth of LUNA tokens on the Terra Station to be burnt. If the price of one UST is higher than $1, $1 worth of Luna can be bought and burnt to mint one UST, which is to be sold for an instant profit; meanwhile, if the price of UST is lower than $1, one UST can be bought and burnt to mint $1 worth of Luna, which is to be sold for profit, too. The arbitrage mechanism helps UST peg to the U.S. dollar. The whole process relies heavily on Luna’s liquidity and token value. Once UST was supplied and minted far more than the realizable market value of Luna, the stability of UST could no longer be sustained, and a death spiral would be formed.
- That is exactly what has happened since May 9, 2022, before which the total value of UST was $18.7 billion and that of Luna was as close as $20.4 billion. However, after the de-peg of UST on May 9, hundreds of millions of Luna were minted under the arbitrage system. The supply of Luna surged 18,000 times from May 9 to May 14, with Luna’s price plummeting to 1.8 parts-per-million (ppm) and the market value shrinking to 3%. Now that Luna could no longer support the tremendous amount of UST, a complete de-pegging was doomed.
b. The stability of USDD is backed by the reserve assets of the TDR, not the price of TRX.
- USDD’s price stability is maintained by a basket of monetary policies adopted by the TDR and backed by its reserve assets. As long as the TDR holds a sufficient and healthy reserve, the price of USDD is stable.
- The details of the TDR’s reserve assets are published in real-time on TRON DAO Reserve. As of now, there are 990 million USDC, 140 million USDT, 14,000 BTC, and 11 billion TRX in the reserve, with a total market value of close to $2.3 billion, 3 times the value of the 725 million USDD in circulation. Even under the extreme circumstance when the value of TRX reaches zero, the remaining reserve assets worth $1.4 billion are still double the value of USDD in circulation. Therefore, the TDR reserve can provide sufficient and healthy liquidity for the stability of USDD.
- The mutual-minting relationship between TRX and USDD is just part of the effort made to help maintain USDD’s linked exchange rate system, which can be explained by referring to Hong Kong’s case: the Hong Kong Monetary Authority allows swaps between the RMB and the HK dollars, but the RMB is not pegged to the HK dollar. In fact, the stability of the HK dollar is backed by a basket of currencies including the RMB.
c. In a nutshell, price swings in TRX do not have a substantial correlation to USDD’s price stability, so every USDD holder is advised to remain rational and not to be misled in the face of market rumors.
2. Led by misconception swirling in the market, short-sellers borrow and dump USDD, causing it to de-peg, and consequently profit from shorting TRX.
a. USDD Obtain.
- Between May 20 and June 12, short-sellers obtained nearly 100mn USDD through JustLend and SUN.io; and then transferred them to the exchanges Poloniex, KuCoin, and Huobi。
b. USDD dumping.
- On June 12–13, 2022, this user dumped USDD at a loss on KuCoin within a short period of time. During these two days, the USDD/USDT trading pair recorded $19 million and $39 million in trading volume respectively, a 6–10 times increase from the daily average of $3–4 million a few days earlier, pushing USDD down to $0.9111 at one point.
c. Market panic triggered by “USDD de-pegging”.
- Judging from the trending searches on Google Trends, “USDD”, “USDD peg”, and “USDD Depeg” skyrocketed since June 13, and the market began to panic that USDD would repeat the saga of Luna/UST.
d. Profit from shorting TRX with high leverage.
- Short-sellers took advantage of the panic in the markets and shorted TRX with high leverage on centralized exchanges. On June 13, 2022, the trading volume of TRX/USDT Perpetual on Binance surged to $1.6 billion, a ten-fold increase from the daily average a week earlier. On June 15, 2022, the annualized funding rate for shorting TRX hit a record high of 534%. As a result, the price of TRX fell to $0.04567 on June 15, 2022, a 40% drop from $0.07605 the closing price on June 12, 2022. Short-sellers then closed their positions and succeeded in profiting from shorting TRX.
3. In other words, the recent price swings of USDD stemmed not from an ill-designed mechanism between USDD and TRX but from the attack on the two tokens by short-sellers leveraging the misconception in the market. Many USDD holders read the false headline and they deserve to see the truth.
4. Although short-selling and long-buying run against the TDR’s mission to safeguard the price stability of USDD, they are legitimate acts driven by the market. As the TDR also adopts market-oriented means to maintain the value of USDD, we will not criticize the acts of short-sellers and long-buyers. Pursuing profits is a natural part of the market, and short-sellers and long-buyers have their moral ground to stand on.
IV. What monetary policies will the TDR adopt to maintain the value of USDD?
1. The goal of monetary policies is to maintain USDD’s price stability and drive the growth of the TRON ecosystem.
- Just like any central bank, the TDR, the central bank at phase 1.0 of USDD, adopts monetary policies to maintain its price stability and spur growth in the TRON ecosystem.
- It is not like what some have argued, that the TDR’s monetary policies are profit-oriented, for such action runs against the TDR’s founding mission to guide and regulate USDD. Nevertheless, rational investors are advised not to take the TDR’s monetary policies as their investment guide.
2. Monetary policy instrument №1: setting interest rate
- One of the main monetary policy tools for central banks worldwide, setting interest rates is a mechanism often used to regulate the supply and demand of currencies and loans. Similarly, the TDR works with its partner institutions and protocols to set USDD’s benchmark interest rates and has the power to adjust the rate at any time based on market conditions.
- Now, the initial benchmark interest rate for USDD is 30% and is slightly higher on platforms that recently listed USDD, all subsidized by the TDR to acquire new users and drive up its adoption. In the early stages of USDD, its interest rate will stay at a higher level than those of the US dollar and USDT/USDC. The rationale behind such a decision is that the TRON ecosystem is similar to some emerging economies such as China, Vietnam, and India, which want to attract foreign capital with higher interest rates to grow their economies.
- Interests for USDD holders are paid out in USDD issued by the TDR and credited to their accounts. USDD holders have full control over USDD in their wallets. Users staking or lending USDD enter the respective smart contracts on different protocols, to which the TDR has no access. This dispels the misinformation claimed by some that USDD is a Ponzi Scheme and that the TDR convinces people to invest money by promising unreasonable high returns.
3. Monetary policy instrument №2: open market operations.
- Open market operations (OMO) refer to a central bank openly buying or selling bonds in the secondary market. These central banks are essentially trading base money for bonds in the secondary market: they deposit base money through purchases and withdraw it through sales, thereby adjusting the supply and demand of the base money and stabilizing its value.
- The TDR adopts a mechanism that functions similarly to OMO. Through buying or selling USDD and reserve assets, including TRX, BTC, USDT, and USDC on CEXs or DEXs, it manages to keep USDD’s price stable. The TDR will announce each of its OMO publicly to the market on its Twitter account (@trondaoreserve) to positively guide the market perception.
- It is worth noting that the core purpose of the TDR’s OMO has been and will always be to maintain USDD’s price stability rather than profit from trading. The proceeds generated from OMO, if any, will go to the reserves for efforts to stabilize USDD’s price and further the growth of TRON’s ecosystem, as echoed by the 1 trillion yuan ($158 billion) transfer from the People’s Bank of China to the Chinese Central Government to help finance fiscal spending this March.
4. Monetary policy instrument №3: window guidance.
- In times of severe market turbulence, the TDR will partner with institutions such as JustLend and CEXs to limit the amount of USDD and TRX lent or even temporarily pause the lending of USDD and TRX to crack down on malicious short-sellers.
5. Monetary policy instrument №4: minting-burning mechanism of TRX and USDD.
- The minting-burning mechanism between TRX and USDD also effectively guarantees USDD’s stability. Depending on the situation, the TDR will achieve this by employing methods such as enabling or disabling the minting process, adjusting the mint-burn ratio, and imposing upper limits on daily minting and burning activities, all carried out in a decentralized manner.
6. On top of the above monetary policy instruments, the TDR will also explore more use cases of USDD to maintain its value.
V. What’s the guiding principle of the TDR’s monetary policies?
- The end goal of the TDR’s monetary policies is to maintain USDD’s price stability and spur the diversity of TRON’s stablecoin ecosystem. While striving to minimize the impact of its monetary policy instruments on the market, the TDR aspires to give all USDD holders access to diverse market activities and present the crypto space with a decentralized, reliable stablecoin option.
- In short, the guiding principle underpinning the TDR’s monetary policies is to disclose the information required to gain the market’s trust and confidence in USDD’s price stability, while at the same time concealing the information that may be exploited by short-sellers and long-buyers for predictions on the TDR’s next move to avoid price swings and market turbulence.
- A case in point is what Alan Greenspan, the 13th Chair of the Federal Reserve, has said to play down the impact exerted by the Federal Reserve on the market: “If I seem unduly clear to you, you must have misunderstood what I said.”