Just three days before Terra collapsed, Tron launched its own algorithmic stablecoin, USDD.

It’s still unknown what exactly catalyzed Terra’s demise. Some in that blockchain’s community pushed a conspiracy theory that institutions including BlackRock (BLK) and Citadel Securities forced liquidations by exploiting a known flaw in the network’s design. Others think the blockchain just couldn’t handle the stress because all risk assets pulled back because of a looming economic recession.

Here, despite everything we are going to study and research $USDD and try to understand the protocol to see whether something like $UST and $LUNA crash can happen to this stablecoin or not.

First of all I have to clarify that I don’t like Justin Sun and I believe he has had many ridiculous behaviours. But, let me assure you I am not going to let this problem affect my judgement about $USDD. Alright? OK, now that we clarified that let’s keep up.

$USDD is an “decentralised” algorithmic stablecoin on TRON blockchain. The TRON DAO Reserve  is the custodian of $USDD and guarantees its price stability.

The sentences above are the whole thing you can find on usdd.io webpage. After that it is only talking about $USDD staking with up to 30% APY (30% on a stablecoin? really? how? GIVE me some!).

But, let’s see how this stablecoin actually works.

If you open the Whitepaper you can see how it works, but I’m going to tell you in brief what is happening here.

$USDD must maintain at $1 all the times. Let’s have two discussions where the price goes up or down.

• When $USDD's price < 1 USD ,users and arbitrageurs could swap 1 $USDD to 1 USD worth of $TRX in the protocol.

• When $USDD's price > 1 USD ,users and arbitrageurs could swap 1 $USDD to 1 USD worth of $TRX in the protocol.

Let’s see what it means. If you have the price of $USDD greater than $1, you can bye $1 worth of $TRX, change your $1 worth of $TRX to 1 $USDD in the system, go sell the $USDD in the market and gain some profit while making the price right back to $1.

On the other hand, if the price of $USDD is lower than $1, you can buy 1 $USDD in the market (by this demand the price will set back to $1), go in the system and change your 1 $USDD to $1 worth of $TRX and sell back the $TRX in the market.

Hmmmm. That’s interesting. Isn’t that exactly the same thing that TerraForm did with $LUNA and $UST? YES, it is. That’s exactly what they did. So what’s the difference? Here they have no difference. OK, let’s move on.

Sadly, not yet. We are at phase 1 of the $USDD named Space. Who are the minters? TRON DAO Reserve and Stakeholders. “DECENTRALISATION”.

Phase 2 will happen in October 2022 named ISS. In this phase we’ll have the testnet of $USDD.

Phase 3 in November 2022 named Moon. $USDD “decentralised” network will be released officially.

Phase 4, the last phase, in December 2022 named Mars. $USDD mainnet will go live. And most important’y everyone can now issue and burn $USDD.

Until December 2022, TRON DAO Reserve will have all the rights and all the power to peg or de-peg $USDD to or from $1. Hmmmm. That’s interesting.

Let’s make a flashback to what happened to $UST. So $LUNA just got big and by this it could issue a lot of $UST, and with a lot of $UST it just got bigger and so on. Someone (I’m not accusing BlackRock or Citadel) Just found that $LUNA is in a big bubble and if some big amount of $UST needed to be cashed out, Terra could not afford paying back. So what happened? They opened a short position on $LUNA, and they attacked $UST with a huge amount of $UST needed to be burnt. So the algorithm minted $LUNA sold it on the market to pay back the $UST burner. But the amount of $UST was so huge that the algorithm could’t afford it and it de-pegged $UST and this followed by a FUD of people who wanted to sell their $UST in the market and more $LUNA just got sold in the market to bring up the price of $UST. So $LUNA crash happened.

Can that happen to $USDD? Let’s watch this video that Justin Sun is talking about $UST and $USDD.

https://www.coindesk.com/layer2/2022/05/20/justin-sun-still-thinks-algorithmic-stablecoins-are-a-good-idea/

Sun said whatever the impetus, Terra’s collapse was preceded by a major move of capital on the network after Terraform Labs began to withdraw $UST from a liquidity pool on decentralized stablecoin exchange Curve.

Sun may be versed with the technicalities of $UST’s collapse, considering some experts have noticed the similarities between Tron’s $USDD and Terra’s $UST. He said he planned to launch the $USDD stablecoin project three months ago, and is thankful for the learning experience of $UST’s “dramatic” end.

That said, Sun remains concerned that $USDD could be attacked by short sellers or face a similar fate to that of $UST.

Still in its early stages, Sun said $USDD “is very safe.” At the very least, its $348 million market capitalisation means if it collapsed it wouldn’t cause cascading problems across the cryptocurrency markets as $UST did. Sun, characteristically braggadocious, said he’s eyeing a $2 billion valuation for the coin.

I know, I know. You all wanna know what will happen to $USDD. Do I open a short position or not? But, before that let’s talk about some more technicalities. Smart Contracts.

I reviewed the $USDD smart contract and all contracts related to it. So if you are not a technical guy, don’t bother yourself going through it.

The $USDD smart contract is like every other ERC-20 smart contract. What this means? In simple words, it’s OK. I don’t say that. SlowMist is the one saying that. But it’s OK don’t worry about that.

Let’s move on to the Issuer contract. Is the contract OK? SlowMist, again, believes it has no bugs. I read the contract myself. I’m not a professional smart contract reviewer, but I can understand Solidity language more or less. In this review I had found no threats or issues that I can address. It seems that the issuer contract has no holes that someone can easily go through to make many $USDD for themselves.

The last contract I read and studied is the burn address of $TRXs. That address in contrast to $LUNA case is not in custody of someone and cannot be used to buy $BTC. :)

This address is a contract address that SlowMist, again, thinks everything is alright with it. I, too, think that there is no issue among the contract and no one can touch the $TRXs in the contract unless there is a $USDD giving event happening.

OK, the contracts pass SlowMist and me as reviewers (Like I’m such a great code reviewer :))) ).

Before answering to this question, we need to see the yields. You know? Yields are important. We should see where they are coming from. Especially this high!!

First, let’s talk about yields. If the government tells you to give it your money to get your money back at the end of the year with 2% more money, would you do it? Some might will and some might won’t. It doesn’t actually matters if you do or not. What matters the most is the question: “How are you giving me this 2% more money?”

There are some ways that government can pay you this additional 2%. On of the ways is that they work with your money, like lending it to someone in exchange of interest. Or buying some stocks in the stock market in hope of profit. Or buying some commodities like Gold in hope of profit. But usually these won’t happen. The government just issues more money at a rate of the interest they are willing to pay you and give you the inflation money as the interest (OK, OK, some governments don’t do that. I know it. But all I’ve said is in the means of educating something else).

So what happens if an exchange or DEX is telling you they are paying 2% interest per year for a stablecoin. These don’t have authority to print some more stablecoin, so they are most likely to work with your money and willing to pay you 2% for this lending you have done. 2% is rational, even 3% is rational. But what if they tell you the interest is 30% on a stablecoin that has no price fluctuation. What the hell are they doing to give you 30% yield? Other than printing so much money how can they do that?

I actually didn’t understand how these yields are happening. And if they are real where the money is coming from. I believe that this money is coming from a previous minting using $TRX by TRON DAO Reserve just as an advertisement for people to make them use $USDD instead of other centralised stablecoins. Anyhow, this yield shouldn’t last for long and if it does, I will be doubting the whole thing I said about the contracts being alright.

In conclusion, this high yield is frightening me up and makes me doubt the whole projects as a Ponzi-scheme.

In one sentence, it might.

If the market cap of $USDD gets big enough and $TRX too goes up in price, there is a high probability that $LUNA crash happens to it. It won’t definitely be as big of a crash as $LUNA because first of all market cap of $TRX is not that big and by high probability market cap of $USDD won’t get that big. And secondly, $USDD has seen $LUNA crash once and they know if a big sell of comes to $USDD it is best for them to use as much $TRX in the reserve as they can as soon as possible to stop the de-peg.

I don’t see it happen soon, and I don’t see it happen too big. But, some time in the future, if $USDD market cap passes $5 billion, I see it happening.