'Revolution' Promised by Tron's Justin Sun Looks Like Clone of Terra's Algorithmic Stablecoin

Tron, an Ethereum competitor blockchain, is the latest to launch an algorithmic stablecoin inspired by the success of Terra’s UST. It has lofty goals for USDD, but not much else.

AccessTimeIconMay 4, 2022 at 9:16 p.m. UTC
Updated May 11, 2023 at 3:44 p.m. UTC
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Tron, the blockchain founded by entrepreneur Justin Sun in 2017 to compete with Ethereum, will release its algorithmic stablecoin called decentralized USD (USDD) on Thursday.

But reviews are already pouring in from crypto analysts who have glanced at early details of the project and say it mostly looks like a carbon copy of the Terra blockchain’s fast-growing stablecoin, UST.

“It is mechanistically similar to Terra's UST in terms of minting and price stability,” said Dustin Teander, an analyst at digital asset data platform Messari. Kevin Zhou, co-founder of the hedge fund Galois Capital, called it a “LUNA clone,” and Alex Krüger, a popular crypto analyst, echoed his views in a tweet.

Algorithmic stablecoins – cryptocurrencies with a price pegged to another asset, usually to the U.S. dollar by a pre-programmed or "algorithmic" incentive mechanism – are suddenly the talk of the town in crypto. The amount outstanding of Terra blockchain’s stablecoin, UST, has swelled to $18 billion from $2 billion. That's partly because of the current financial environment, where inflation is high, the Federal Reserve is raising interest rates and investors are hunting for high yields. Stablecoins like UST can in many cases be parked in blockchain-based protocols or deposited with crypto lenders for high yields.

Plenty of aspiring market entrants have taken notice of UST's fast growth; Tron's just the latest.

What we know so far

Tron says it also aims to raise $10 billion for TronDAO, a reserve that theoretically could help maintain the dollar peg in a potential market turmoil.

In an open letter on April 21, Sun, Tron's founder and ex-CEO, said that “TRON is starting a self-imposed revolution, pooling all its resources to create USDD, a fully decentralized stablecoin underpinned by mathematics and algorithms, bringing the development of stablecoin to the next level.”

According to USDD’s white paper, the peg will be sustained by creating and destroying USDD supply by a mint-and-burn mechanism and an arbitrage swap.

If the price of USDD falls below $1, users can buy 1 USDD in the external market and then swap 1 USDD for a guaranteed $1 worth of TRX. As a result of the arbitrage, 1 USDD will be burned, and $1 worth of TRX will be minted. Theoretically, as the supply of USDD decreases, USDD's price will increase, to the point where there is no room for arbitrage.

Similarly, if the price of USDD is above $1, users can swap $1 worth of TRX token for 1 USDD in the protocol. This way, 1 USDD will be minted and $1 worth of TRX will be burned, expanding the supply of USDD until its price will go down to the peg.

The white paper also unveils the TRON DAO Reserve, “the first decentralized reserve in the blockchain industry.”

Sun said in the open letter that the reserve “aims to safeguard the overall blockchain industry and crypto market, prevent panic trading caused by financial crises and mitigate severe and long-term economic downturns.”

The white paper says that “upon its establishment, the TRON DAO Reserve will set its basic risk-free interest rate to 30% per annum and facilitate other decentralized and centralized organizations that accept USDD to implement consistent interest rate policies.”

Borrowing the Terra playbook

Does all this sound familiar?

The arbitrage swap of USDD and TRX mirrors Terra's way of maintaining UST stablecoin’s peg with the blockchain’s native token, LUNA.

The Tron DAO resembles the Luna Foundation Guard’s reserve that supports the UST’s peg, standing at $2 billion with a goal of raising $10 billion.

And the “risk-free” – as the white paper puts it – 30% annual yield is a tool to generate demand for USDD, just as Anchor, a savings and lending protocol on the Terra blockchain, propped up demand for Terra’s stablecoin with a 20% annual yield on deposits in UST.

This week's launch of the Tron algorithmic stablecoin will mark the first of a four-stage road map for USDD, officials say. The full rollout should be complete by the end of this year.

Still, not much else is defined at this point.

“For example, it's not clear what asset the $10 billion reserves will be in or how or when they will be utilized in the system,” Teander said.

Tron didn't reply to questions after multiple requests for comment.

Tron's lackluster track record

So, Tron needs to get users on board quickly to live up to USDD’s lofty goals. How did it fare in the last five years of its existence?

“Historically, Tron has lagged other ecosystems in building out consumer applications,” Teander said.

Data from decentralized finance (DeFi) data platform DefiLlama shows that most of the money locked on the Tron blockchain isn't being used. There’s $4.37 billion deposited – in crypto terms, total value locked – on the Tron blockchain, and the three largest protocols (JustLend, JustStables, SunSwap) make up almost all of the deposits.

JustLend, the biggest of the three, has $1.9 billion of deposits, but only $67 million borrowed, meaning that only 3.5% of the funds are actually used. JustStables, a DeFi system that already issues a dollar-pegged stablecoin (USDJ) on Tron, has $1.3 billion in deposits, but only $288 million in stablecoins were minted. And SunSwap, the third largest protocol, has very little activity outside of trading Tron’s native cryptocurrency, TRX.

Famously, Terra’s yield-earning platform Anchor offers up to a 20% annual yield on deposits, a subsidized rate not sustained by lending revenue and reliant on outside sources to maintain payouts.

Tron aims to outbid Terra by offering 30% annual yield on USDD deposits at the beginning.

“A 30% risk-free rate is a high rate to maintain," Teander said. "Especially if there is no organic income to partially offset the cost.”


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Krisztian  Sandor

Krisztian Sandor is a reporter on the U.S. markets team focusing on stablecoins and institutional investment. He holds BTC and ETH.

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