Exploring $USDD and an Investment Thesis for $TRX
After the fiasco with Luna/UST, I have been digging into the new stablecoins.
Earlier this week I wrote an article about $USN:
Now let’s look at the new stablecoin of Justin Sun on Tron: $USDD
When $USDD’s price < 1$.
E.g. USDD trades at $0.9. Now anyone can swap 1 USDD for 1$ worth of TRX.
Then sell 1$ of TRX for another (stable)coin, so that you now have 0.1$ profit.
As a result, 1USDD will be burned and 1$ worth of TRX will be minted.
Supply of USDD decreases -> price of USDD increases.
When $USDD’s price > 1$.
E.g. USDD trades at 1.1$. Now anyone can give 1$ worth of $TRX to the system.
Get paid $1.1 in USDD.
Sell $1.1 USDD for another (stable)coin, so that you now have 0.1$ profit.
As a result, 1USD worth of TRX will be burned, and 1USDD will be minted. As the supply of USDD rises, USDD’s price will go down, to the point where there is no room for arbitrage and 1USDD re-equates to 1USD.
This sounds all too familiar. That’s the same mechanism as Luna/UST… a depeg waiting to happen???
But wait, there is more…
The Elusive Reserves
Justin Sun tweets boasting about 10 billion in reserves.
One of the central tenets in crypto is: Don’t trust, but verify.
I have asked in discord, but I couldn’t find on-chain proof that the reserves were there.
I wrote to Tron dao reserves via email as I don’t want to misrepresent them, but as this is a time sensitive piece I couldn’t wait more than a day on the reply. I will update this as I hear back from them.
The whitepaper reads: “The TRON DAO Reserve will raise $10 billion in early-stage reserves from prominent blockchain industry players, effectuating deposits over six to twelve months.”
The whitepaper is written in april 2022. So that means between October and April 2023 the 10 billion should be there (hopefully). So for argument’s sake let’s assume that the reserves are not there right now.
So how under/over collateralized is USDD right now — assuming there is no $10billion (yet)?
Let’s not forget that UST was undercollateralized. Also let’s not forget UST was a 20+ billion MC venture. Whereas USDD still is less than 500million. That means Justin Sun’s own deep pockets will probably be enough for now as a backstop against a de-peg. But aside from his own pockets, the TRON DAO Reserve itself has enough $$$ for every USDD in existence and more.
So if we put that information in a little table we get:
We can see that USDD is overcollateralized and has a backing of 120%. So even without Justin Sun’s own funds or the $10 billion raised, it is OVERcollateralized right now.
Degens are gonna degen.
Some people will see USDD is overcollateralized and will still want to get in on the 30% APY during this bearmarket.
As the USDD marketcap grows, TRX will leave the exchanges and get burned. Thus pushing the price up.
Let’s do some back of the envelope math on how much numbah go up:
(If you don’t like Math feel free to scroll down to get the conclusion)
Here we see how much TRX has been burned so far:
I put the TRX tokens that were burned in the past week in this table:
If this burn rate is sustained for 2 months:
2.8 billion * 8 wks = 22.4 billion burned. Which is ~24% of supply that’s burned.
Yes, I know, that’s a big IF.
*For those new to crypto: why numba go up?
This makes sense because Price = Marketcap / Supply.
Supply is burned, Marketcap stays the same, numbah go up.
Look at what BNB burns did to the price for example.
Now it’s important to note that circulatory supply isn’t necessarily as important as liquidity on exchanges.
So an even higher % of supply on exchanges could be burned, creating an even higher price increase then the calculated 24%.
Also if people wrap their heads around this mechanism and go long TRX, it amplifies this effect even more as the marketcap of TRX grows. So the price increase could be more significant.
As noted here in a chart by @lightcrypto the balance on exchanges is indeed dropping:
The chart shows that TRX has been holding up pretty well in the last months. The relative strength is there.
What if I’m wrong?
People don’t ask themselves this question often enough. What would prove my thesis wrong:
If the market has too much PTSD from Luna/UST and doesn’t want to go near a stablecoin with the same mechanism even though it’s OVERcollateralized.
BTC rugging us all.
Because of the macro backdrop, this is certainly not a free lunch and a tricky play. We’re also still in a bearmarket so don’t expect big multiples. But 25% or more is a big move during a bearmarket.
I’m personally staying away from high leverage and am using a Stoploss. In general I never risk more than 2–5% of my account if my SL gets hit.
USDD Long Term
For the long term my same concerns apply to USDD as they did for $USN. Which I wrote about here:
My concerns for USDD for the long term future:
USDT being used as a backstop for USDD as regulation is coming, with USDT troubled history.
Same mechanism used as for UST/LUNA which is shown not to be sustainable in the long run.
Regulation on USDD will be fierce since the same mechanism is used.
Please feel free to reach out to me on twitter and rip this thesis apart.
Happy to be proven wrong!
Lastly I want to finish with (quoted the legend, Cobie):
Oh, and none of this is investment advice. I’m not a professional and mostly am stumbling my way through the world the same way I was at age 13. Just documenting and sharing some thoughts and none of it is a science. I, like everyone else, am simply an aged baby walking blindfolded into a forest, startled by my own humanity.
It has been a week since this post. Since I wrote this post another ~1,5 billion $TRX got burned. Rate of change is going down, something to keep an eye on…