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- 1 The USDD is a stablecoin whose value is tied to the US dollar.
- 2 The relationship between the prices of USDD, the US dollar, and the currencies in its reserve is regulated by the USDD algorithm.
A stablecoin is a cryptocurrency whose price is linked to a more stable currency like fiat currency or a commodity asset like gold or metal, or other cryptocurrencies. It could be tied to a single currency (Terra UST is tied to LUNA) or a group of currencies. The USDD (also called decentralized USD) is a stablecoin whose price is tied to the US dollar by a smart contract and maintained by an algorithm through a reserve of Bitcoin, Tron, and USDT. It was developed in April 2022 by Justin Sun, the founder of the Tron blockchain.
The USDD collateral system
To maintain their stability, stablecoins are either backed by a reserve containing other currencies (through a collateral system) or regulated by an algorithm. When a bank wants to lend you money, they usually ask for collateral. This is anything of value that will be held in their reserve and sold in case you can’t pay back the money you were given. This is the same for a collateral stablecoin.
Fiat currencies, commodity assets, or other cryptocurrencies that have the same value as the stablecoin issued are kept in a reserve as collateral. So a person who buys a stablecoin can always exchange it for the same value at which it was bought. With USDD, the value of the assets in its reserve is more than that of the coin issued. USDD has a collateral ratio of over 200%. This means that the value of the currencies in its reserve (Bitcoin, Tron, and USDT) is twice that of the USDD being issued. The team also guarantees a minimum of 130% as collateral, meaning that for every USDD issued, there is at least $1.3 worth of BTC, Tron, or USDT serving as collateral.
How does the USDD algorithm system
The relationship between the prices of the US dollar, USDD, and the currencies in its reserve is maintained by an algorithm built into its smart contract. When the price of 1 USDD falls below $1, its algorithm temporarily allows users to swap 1 USDD for any currency in its reserve. The USDD swap is burnt to create scarcity and drive up the price. Similarly, if the price of 1 USDD rises above $1, users are allowed to swap $1 worth of Bitcoin or Tron for 1 USDD. This can continue until the price of 1 USDD falls back to 1 dollar.
The USDD algorithm enables users to make money by helping stabilize the price of the token to the US dollar. If the value of USDD falls to $0.8, users get to swap 1 USDD for 1 dollar worth of Bitcoin. But the USDD swapped at that time cost $0.8, this means that the user can make $0.2 extra by selling the BTC created from the swap.
To confirm the current price of the US dollar, the USDD protocol uses Super Representatives. Super Representative is a committee of 27 Tron holders voted by the Tron holders in the network and replaced every 6 hours.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
