Ethereum Watch

Less than a month after launching USDD, an algorithmic stablecoin that uses a similar mechanism to Terra’s collapsed UST, TRON has become the third-largest blockchain by total value locked in its DeFi protocols.

TRON Becomes Third-Largest DeFi Ecosystem

TRON’s DeFi ecosystem is benefiting from its new high-yield stablecoin. 

Despite the relatively shaky market conditions permeating the DeFi sector following Terra’s collapse earlier this month, TRON’s ecosystem of decentralized applications is thriving, at least in terms of total value locked.

Per data from Defi Llama, TRON’s DeFi ecosystem has grown by roughly 26% over the past month, rising from around $4 billion to $5.38 billion today. It’s surpassed other popular Layer 1 networks like Avalanche and Solana to become the third-largest blockchain in total value locked, trailing only Ethereum and BNB Chain. For comparison, the aggregate DeFi sector lost around $90 billion in liquidity over the past month alone, with most leading blockchains seeing their locked value plummet between 30 and 70% following Terra’s collapse. 

The most likely reason TRON’s ecosystem has surged is the rapid growth of its recently launched stablecoin, USDD, which has promised investors a “risk-free” 30% interest rate. According to its whitepaper, USDD is designed to be a “cryptocurrency issued by the TRON DAO Reserve with a stable price” with a “built-in incentive mechanism and a responsive monetary policy.” This mechanism allegedly allows the asset “to self-stabilize against any price fluctuations,” similar to how Terra’s LUNA token and Bitcoin reserves were meant to stabilize UST before it imploded.  

The whitepaper shows a striking likeness between USDD and Terra’s UST. When USDD trades below $1, arbitrageurs can burn it for $1 worth of TRON’s native cryptocurrency, TRX. Conversely, when USDD trades above $1, arbitrageurs can swap $1 worth of TRX for one USDD, minting more USDD in the process and increasing its supply. Theoretically, this mechanism helps ensure that its price will return to its desired $1 peg. 

Similar to Terraform Labs’ plan to raise $10 billion in Bitcoin to protect UST’s peg amid extraordinary market volatility, the TRON Foundation has created the TRON DAO Reserve with the same goal: to raise $10 billion in capital to protect USDD’s peg.

💸The @usddnetwork will provide custody service for the $10B worth of highly liquid assets raised from blockchain industry initiators and use them as an early-stage reserve.

⚖️The @trondaoreserve will set its basic risk-free interest rate to 30% per annum.#USDD #TRONDAOReserve pic.twitter.com/HrYeGmwWp0

— H.E. Justin Sun 🅣🌞🇬🇩 (@justinsuntron) April 21, 2022

To incentivize users to mint and stake the stablecoin across various DeFi applications on TRON, the network’s controversial founder Justin Sun has promised a 30% “risk-free” interest rate on USDD. While it remains unclear where this yield comes from, the recent surge in TRON’s DeFi ecosystem suggests that the incentive mechanism is working. Since USDD launched on May 2, it has grown exponentially, reaching a market capitalization of around $545 million. Most of the USDD supply is locked in various DeFi protocols on the TRON network. with most of it finding its way into various DeFi protocols on the Tron network.

While the USDD launch has helped TRON over the past few weeks, it’s worth noting that the TRON DAO Reserve, USDD’s official “custodian,” has failed to highlight any of the risks associated with its new algorithmic stablecoin anywhere in its official documents or public communications. After all, USDD functions much like Terra’s UST, which met its end in a $40 billion death spiral event. In Terra’s collapse, when UST began to lose its peg to the dollar, it surpassed LUNA’s market cap, signaling that the death spiral was in motion. If USDD keeps growing at this pace, it could soon surpass TRX’s $7.74 billion market capitalization. As TRX is supposed to back USDD, that could mean the stablecoin ends up suffering the same fate as UST—potentially causing another industry-wide wipeout. 

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.

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