What is Decentralized USD (USDD) and How Does it Work? | KuCoin Crypto Gem Observer

2022/07/08 10:15:40

Since its launch over a decade ago, the crypto space has achieved notable adoption and price action progress. However, despite unlocking these milestones, the industry is yet to achieve its intended purpose, serving as an alternative payment system.

Crypto’s inability to dominate the settlement sector emanates from several factors. The top shortcomings inhibiting mainstream adoption include high volatility and scalability. Take Bitcoin (BTC) as an example. The cryptocurrency has a history of experiencing wild price swings over the years.

As for scalability, the Bitcoin network has low transaction throughput. With Mastercard claiming its network can handle 5,000 transaction messages in a second, the Bitcoin network can only complete between three and seven transactions per second.

Looking to address the scalability and volatility issues in cryptocurrencies, TRON DAO Reserve launched Decentralized USD (USDD) in May, 2022.

What is USDD?

USDD is an algorithmic stablecoin that runs on TRON, a multipurpose smart contract blockchain, BNB Chain, and Ethereum. The stablecoin is pegged to the US dollar in a 1:1 ratio. TRON DAO Reserve chose to peg USDD’s price to the US dollar because it is the most widely used fiat currency globally.

By maintaining its peg to the US dollar, USDD’s price remains stable at all times, helping the stablecoin address the volatility problem in cryptocurrencies.

However, maintaining USDD’s peg to the US dollar needs collateral. To solve this puzzle, TRON DAO Reserve leverages TRON’s native token, TRX, as the base currency for USDD. Additionally, the DAO added the backing of high-liquidity cryptocurrencies like BTC and Tether (USDT).

This setup helps ensure the over-collateralization of USDD because the value of the collateralized assets consistently remains higher than the amount of USDD in circulation. The stablecoin currently boasts an over-collateralization ratio of over 200%.

Moreover, USDD leverages responsive monetary policy mechanisms that allow the overcollateralization ratio to adjust dynamically and maintain stability even as the values of reserve assets fluctuate.

How Does USDD Work?

USDD in the secondary market relies on a decentralized price oracle to estimate accurate prices. The mechanisms behind the price oracle involve Super Representatives (SRs) voting on what they believe to be the current exchange rate in USD and providing the USDD price oracle on the TRON network.

The voting process involves tallying votes on each block and taking the weighted medians as the true rates. SRs that vote within the standard deviation of the chosen median get rewards. These rewards seek to incentivize accurate voting among SRs.

However, the incentivization model introduces another challenge because SRs can team up and vote on a false rate. To address this problem, TRON DAO Reserve limits voting to people deeply vested in the USDD ecosystem.

Additionally, the system punishes SRs that fail to submit their votes before the voting ends or those that vote outside the standard deviation of the chosen median.

SR rewards come from income that TRON gets from stablecoin swaps and TRX-stablecoin swaps. Specifically, the funds come from Tobin Tax and Spreading Fee. Tobin Tax is the fixed rate for stablecoin swaps within the TRON ecosystem. On the other hand, swapping USDD to TRX carries a 0.5% spreading fee.

Who Created USDD?

TRON DAO Reserve, a decentralized autonomous organization that the TRON network initiated, created USDD. The DAO aims to safeguard the overall blockchain industry and crypto market, prevent panic trading, and minimize severe economic downturns. TRON DAO Reserve also oversees TRON-based stablecoins and ensures their price stability.

Members of TRON DAO Reserve include Alameda Research, Amber, Poloniex, Ankr, Mirana, Multichain, FalconX, and TPS Capital, to mention a few.

What is USDD Used For?

With USDD running on three blockchain networks, it serves as an effective online medium of payment that boasts low transaction fees.

As the world continues embracing decentralization, USDD stands to disrupt the financial sector and minimize financial exclusion.

USDD’s stable nature also allows crypto traders to use it as a volatility hedge. In times of extreme market conditions, traders will be able to keep their holdings safe through USDD.

On top of this, traders can stake USDD and earn annualized yields. Per the TRON DAO Reserve website, traders that stake USDD are eligible for a 28.46% APY.

What Makes USDD Unique?

TRON DAO Reserve has the ability to replenish reserves in the authorized contract when they fall beyond a certain threshold. Specifically, the DAO releases USDD from the issuance contract after getting five out of seven signatures.

The signature-authorized USDD will be locked for 10 days before the authorized contract can withdraw the funds. Coupled with USDD’s responsive monetary policy mechanisms, the DAO’s ability to replenish reserves helps maintain USDD’s stability.

Additionally, TRON DAO Reserve ensures transparency by storing all collateral assets in on-chain accounts and listing them on its website. This helps set the token apart from other algorithmic stablecoins.

Closing Thoughts

By leveraging responsive monetary policy mechanisms, USDD remains stable despite turbulence in the crypto market. As a result, the stablecoin positions itself as an ideal volatility hedge. Moreover, USDD’s support for three blockchain networks optimizes its use in everyday transactions. These features will help USDD rise to prominence quickly.