Another 'algorithmic' stablecoin fell below $1, but it's not 'Terra 2.0'

USDD, a "algorithmic" stablecoin guaranteed to always be $1, fell to 93 cents on Sunday.

A controversial stablecoin called terraUSD, which came out just before terraUSD went down, is having trouble staying tied to the U.S. dollar.

On Sunday, the so-called "algorithmic" stablecoin USDD, which is supposed to always be worth $1, fell as low as 93 cents. The person who made the coin has saved up close to $2 billion worth of bitcoin and other digital tokens as a safety net in case investors all leave at once.

People are worried that USDD could end up like terraUSD or UST, which was supposed to be a stable currency but failed and was part of an experiment called Terra. The collapse of UST led to a wider sell-off of cryptocurrencies, which has been made worse in recent weeks by a growing liquidity crisis on the market.

The Tron DAO Reserve, which runs and manages the stablecoin, said that the price of USDD should be a little bit unstable because it is "decentralised."

The group tweeted last week, "A certain amount of volatility is unavoidable." "The market volatility rate is currently between +/- 3 percent, which is a good range. We'll keep a close eye on the market and act based on what we see."

On Wednesday, the USD was worth about 97 cents.

Even though people are worried that the same thing will happen with USDD as it did with Terra, experts say it's not likely to happen because USDD is much smaller and crypto investors haven't bought much of it.

What does USDD mean?

USDD came out at the beginning of May, a few days before UST began to fall below $1. Over the past week, it has always traded below the dollar peg it was supposed to be tied to, as selling has gone up.

USDD doesn't just sit on piles of cash and other assets that are like cash. Instead, it uses a complex algorithm and a related token called tron to keep its value equal to that of the dollar.

If this sounds familiar, it's because Terra's UST worked in a similar way. Instead of having reserves to back the stablecoin, units of UST and a sister coin called luna were made and destroyed.

Another thing that USDD and UST have in common is that they have both built up a large stash of other digital tokens to help boost their prices in case a lot of investors sell. Terra bought billions of dollars worth of crypto to try to keep its stablecoin going, but it didn't work.

Monsur Hussain, senior director of financial institutions at Fitch Ratings, said that the USDD's use of crypto as reserves makes it vulnerable to "the same risks as the UST."

"When things are going wrong, crypto prices tend to go up," he said.

Investors can get up to 39% interest on their USDD deposits, which is a very high rate. Anchor, a crypto lending platform, also said that UST holdings could earn up to 20%, which many investors now say is not possible.

Justin Sun, an outspoken crypto entrepreneur who runs Tron, a blockchain that tries to compete with Ethereum, made the coin. Sun, like Terra's founder Do Kwon, has often used Twitter to talk about his projects and answer critics.

The businessman who was born in China has been in many controversies and done many things to get attention. In 2019, he paid $4.6 million to have lunch with Warren Buffett, the CEO of Berkshire Hathaway, but then he changed his mind at the last minute. In the end, the lunch took place in the year 2020.

Not a second Terra

But when you look more closely, it's clear that USDD and UST are not exactly the same.

For one thing, USDD is nowhere near as big as Terra, whose UST and luna tokens were worth $60 billion when they were at their peak. Analysts think that if it fell, it wouldn't have the same effect because of this.

"USDD doesn't have the weight to leave the same trail of destruction as UST," said Dustin Teander, a research analyst at crypto data firm Messari.

He also said that USDD isn't used nearly as much as UST was before it went away.

Public blockchain records show that about 10,000 accounts on the Tron network and just over 100 accounts on Ethereum hold the token.

Hussain said that if USDD fell, there wouldn't be as much fear or spreading as there was when UST/LUNA fell.

And unlike UST, which was only partially backed by crypto, USDD wants to be overcollateralized, which means that its assets will always be worth more than the number of tokens in circulation.

The Tron DAO Reserve says that its reserve has more than $1.9 billion in bitcoin and other tokens, like USDC and tether, which are stablecoins. About $700 million worth of USD is in circulation. Teander says that this makes it less likely that the world will fall apart like it did on Terra.