The crisis of USDD was not as sensational as the collapses of other algorithmic stablecoins (like UST and LUNA), but its stability issues did attract some attention during the instability period of the cryptocurrency market. Here are some backgrounds on the USDD crisis and related issues:
1. The inherent risks of algorithmic stablecoins
As an algorithmic stablecoin, USDD, similar to Terra's UST, relies on algorithms rather than asset reserves for its stability. Although USDD utilizes TRX (the native token of TRON) as support, during severe market fluctuations, the algorithmic mechanism may not be able to adjust the supply promptly, leading to price volatility.
2. The first round of crisis for USDD (May 2023)
In early May, the cryptocurrency market experienced a sharp decline. Many stablecoins (such as USDT, USDC, etc.) showed little price fluctuation, but since USDD relies on TRX as its primary value support, the drop in TRX's price directly affected the stability of USDD.
TRX dropped below its price support in May 2023, causing USDD to briefly fall below $1 in several trades, with a minimum price of around $0.98.
Due to the bleak market sentiment and USDD's decentralized mechanism being unable to adjust supply and demand in a timely manner, the price fluctuations of USDD raised questions about its stability and algorithmic mechanism.
3. Algorithm failure and market response
In the midst of market panic and liquidity crises, USDD encountered a situation similar to the collapse of UST. Although the TRON Foundation took emergency measures, including large-scale buybacks of TRX to support USDD, the lack of fiat reserves and the volatility of TRX itself significantly impacted the stability of USDD. This situation raised concerns among many USDD holders and investors regarding its long-term stability.
In June 2023, the market capitalization growth of USDD began to slow down, and the trust in USDD from some decentralized exchanges (DEX) and DeFi protocols decreased, leading to a reduction or suspension of its use.
Some funds flowed out of USDD, with investors turning to more stable traditional stablecoins like USDC or USDT. Due to the lack of a well-developed risk control mechanism for USDD, this round of liquidity crisis further amplified market doubts about its stability.
4. The relationship with TRX exacerbates issues
The close relationship between USDD and TRX means that the risks of USDD are directly linked to TRX's market performance. As USDD's price fluctuates, TRX also faces selling pressure. This interdependent relationship makes it difficult for the market to have confidence in the stability of USDD, especially when TRX’s price declines, making USDD's price stability even more fragile.
In July 2023, the TRON Foundation issued a statement indicating that they would continue to maintain stability by enhancing the buyback mechanism of USDD, but this move did not fully resolve the market trust issue.
5. Capital outflow and subsequent adjustments to USDD
To cope with the fluctuations of USDD, the TRON Foundation took two main measures:
Enhancing market transparency: TRON released a detailed report on the funding support and buyback mechanism of USDD, hoping to boost market confidence.
Expanding cross-chain support: To enhance the liquidity of USDD, TRON is attempting to increase cross-chain support, allowing it to be used across different blockchains and expanding market application scenarios.
Although these measures have bought some time for USDD, the fundamental problems facing algorithmic stablecoins remain unresolved—under extreme market conditions, the stability mechanisms relying on algorithms often struggle to cope with liquidity crises and large-scale market fluctuations.
6. Recovery after the crisis
The crisis of USDD did not lead to a complete collapse like UST, but it prompted a reevaluation of the limitations of algorithmic stablecoins. The crisis of USDD indicates that even within a relatively closed ecosystem, stablecoins relying on TRX as support still face risks, especially during overall market sentiment deterioration.
However, since USDD did not trigger a large-scale market crash like UST, its price fluctuations have been relatively small, and the TRON Foundation has taken relatively proactive recovery measures, allowing it to continue operating in the market. Whether USDD can stabilize in the future largely depends on adjustments to its algorithmic mechanism and the restoration of market trust.
Note: Although the crisis of USDD did not result in a complete collapse, it exposed several key risks in the context of its underlying algorithmic stablecoin mechanism and market sentiment fluctuations. Despite efforts by Sun Yuchen and the TRON Foundation to stabilize USDD, it still faces significant market challenges, especially the strong correlation with TRX may become a risk point in the future.
