The central theses
- TRON’s DeFi ecosystem is booming. It is now the third largest blockchain in terms of overall value, behind only Ethereum and BNB Chain.
- The surge is likely due to new algorithmic stablecoin USDD surging to $545 million after promising 30% “risk-free” returns.
- TRON’s USDD uses a similar stabilization mechanism as Terra’s UST stablecoin, which suffered a $40 billion death spiral earlier this month.
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Less than a month after the launch of USDD, an algorithmic stablecoin that uses a mechanism similar to Terra’s collapsed UST, TRON is the third largest blockchain by total value locked in its DeFi protocols.
TRON becomes the third largest DeFi ecosystem
TRON’s DeFi ecosystem benefits from its new high-yield stablecoin.
Despite the relatively shaky market conditions sweeping through the DeFi sector following Terra’s collapse earlier this month, TRON’s ecosystem of decentralized applications is thriving, at least in terms of total locked value.
Per data from defi call, TRON’s DeFi ecosystem has grown by about 26% over the past month, going from about $4 billion to $5.38 billion today. It has outperformed other popular Layer 1 networks like Avalanche and Solana to become the third largest blockchain in terms of overall value, behind Ethereum and BNB Chain. For comparison the unit DeFi sector lost around $90 billion in liquidity in the past month alone, with most leading blockchains seeing lockdown value plummeting between 30% and 70% following Terra’s collapse.
The most likely reason why TRON’s ecosystem has skyrocketed is the rapid growth of its recently launched stablecoin USDD, the has promised investors a “risk-free” interest rate of 30%. After his White paper, USDD is designed as “a cryptocurrency issued by the TRON DAO Reserve with a stable price” with a “built-in incentive mechanism and a responsive monetary policy”. This mechanism supposedly allows the asset to “stabilize itself against price swings” similar to how Terra’s LUNA token and bitcoin reserves UST were supposed to stabilize before imploding.
The white paper shows a striking similarity between USDD and Terra’s UST. If USDD trades below $1, arbitrageurs can burn it for $1 worth of TRON’s native cryptocurrency TRX. Conversely, if USDD is trading above $1, arbitrageurs can trade $1 worth of TRX for one USDD, thereby minting more USDD and increasing their supply. In theory, this mechanism will help the price return to the desired $1 peg.
Similar to Terraform Labs’ plan to raise $10 billion in Bitcoin to protect UST’s bond amid exceptional market volatility, the TRON Foundation created the TRON DAO reserve with the same goal: $10 billion in capital -Raising dollars to protect USDD’s peg.
💸The @usddnetwork will provide custody services for $10B of highly liquid assets.
⚖️The @trondaoreserve will set its risk-free base rate at 30% per annum.#USDD #TRONDAOReserve pic.twitter.com/HrYeGmwWp0
— HE Justin Sun 🅣🌞🇬🇩 (@justinsuntron) April 21, 2022
To encourage users to mint and stake the stablecoin on TRON via various DeFi applications, the network’s controversial founder Justin Sun has done so promised a “risk free” rate of 30% on USDD. While it remains unclear where this return is coming from, the recent surge in TRON’s DeFi ecosystem suggests that the incentive mechanism is working. Since USDD’s launch on May 2nd, it has grown exponentially, reaching a market cap of around $545 million. Most of the USDD supply is locked in various DeFi protocols on the TRON network. with most of it finding its way into various DeFi protocols on the Tron network.
While the launch of the USDD has helped TRON over the past few weeks, it is worth noting that the TRON DAO Reserve, the official “custodian” of the USDD, failed to disclose any of the risks associated with their new one in their official documents or public communications highlight algorithmic stablecoin. Finally, the USDD functions similarly to Terra’s UST, which ended in a $40 billion death spiral event. At the collapse of Terra, as UST began to lose its peg to the dollar, it outperformed LUNA’s market cap and signaled the death spiral was underway. If USDD continues to grow at this rate, it could soon surpass TRX’s $7.74 billion market cap. Since TRX is set to support USDD, it could mean that the stablecoin will end up suffering the same fate as UST – potentially leading to another industry-wide wipeout.
Disclosure: At the time of writing this article, the author of this article owned ETH and several other cryptocurrencies.
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