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Introducing USDD, an Algorithmic Stablecoin – WazirX Blog

Introducing USDD, an Algorithmic Stablecoin – WazirX Blog

TRON founder Justin Sun tweeted about the launch of a brand new stablecoin on the TRON blockchain, USDD (or decentralized USD), in April, marking its official entry into the decentralized stablecoin space.

As an algorithmic stablecoin, USDD is comparable to UST, the Terra stablecoin, which, as of early May, was the largest of its kind. Considering how refreshing it is, the thought of investing in the TRON stablecoin might seem intimidating. We will learn more about the USDD in this blog, including how it works and whether or not you should invest in it.

Are you all set to start the party? let’s go!

Before we get to USDD, let’s take a quick catch-up with the algorithmic stablecoin.

What are algorithmic stablecoins?

The purpose of cryptocurrencies known as stablecoins is to maintain a specific value in relation to another asset, usually a fiat currency such as the US dollar. Investors and traders often use stablecoins to stay afloat in the crypto market while hedging against price volatility as they are tied to an expected and stable price. Furthermore, most stablecoins try to set up their pegs using some sort of collateral mechanism.

Algorithmic stablecoins are different. In its most basic form, algorithmic stablecoins are completely non-collateralized. They have no external assets to support their value. Instead, they employ algorithms, which are detailed guidelines or instructions that must be followed for a given result (usually by a computer). These algorithms are designed to reward the behavior of market participants and/or change the amount of coins in circulation, allowing the price of a particular currency to, in theory, settle around the peg.

AMPL, BAC, USDD, UXD and UST are some of the well-known algorithmic stablecoins. We will learn about USDD in this blog.

Introduction to USDD Stablecoin

On May 5, 2022, the TRON stablecoin and digital asset USDD went live on Ethereum and TRON. TRON’s creator, Justin Sun, stated that USDD will offer investors a 30% annual percentage return. Furthermore, it is maintained in a 1:1 ratio to the US dollar, which means that 1 USDD is always expected to equal $1. This means that the USDD retains its value for the US dollar at a fixed exchange rate.

Because USDD and UST are both algorithmic stable coins, which maintain price stability by using algorithms and smart contracts that can control the number of tokens in circulation, USDD has historically been equated to UST.

The algorithmic stablecoin system throttles the total number of tokens available once the price drops below its desired level. Conversely, more tokens will be made available if the price of the token rises above the desired level causing the value of the stablecoin to drop to the desired level. The main purpose of using an algorithmic stablecoin is to have better control over the supply and demand of a coin.

How does USDD work?

Without going into specifics, the USDD stablecoin essentially makes the following pledge to maintain parity with the US dollar:

when the price moves past the peg

Consider a situation where there is more demand than supply for USD. Then, as a result of the market dynamics, the price will exceed $1.

The USDD protocol allows users to temporarily exchange $1 worth of TRX for 1 USDD to bring the price back to $1. In this trade $1 worth of TRX is burned, and 1 USDD is created. The increase in the USDD supply as a result of more users performing these swaps stabilizes the price at $1 per token.

It should be noted that consumers are motivated to actively engage in the process. This is because these TRX-to-USDD swaps offer consumers the opportunity to profit from arbitrage.

For example, if the price of USDD rises to $1, the new USDD you create by exchanging $1 worth of TRX will also be worth $1.1 in an off-network market. Then, by selling that USDD, you can make a profit of ($1.1 – $1.0 =) $0.1. This may not sound like much, but if done frequently, the earnings can increase significantly.

when the price falls below the peg

Similarly, if the price of USDD falls below $1 (say $0.9), you can buy 1 USDD on the open market for just $0.9. Then, under the protocol, you can exchange 1 USDD for 1 TRX. Each exchange causes the system to burn 1 USDD, which reduces the amount of USDD in circulation.

As more users switch from USDD to TRX, the supply eventually decreases. The price then returns to the desired level, which results in $1.

As for the rewards for participating in this process, you can now sell your $1 worth of TRX in the public market to earn $0.1 per swap ($1- $0.9 =).

ground level

You now have the necessary knowledge to decide whether the USDD stablecoin is ideal for you and your crypto portfolio as you better understand what USDD is. Despite being a relatively new stablecoin, it has some distinct advantages that could prove valuable in the future. Both USDD stablecoin and UST stablecoin are algorithmic coins. This can be the basis for your USDD investment if you know how to use USTs appropriately.

Happy investment!

Disclaimer: The cryptocurrency is not legal tender and is currently unregulated. Please ensure that you do an adequate risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information in this section does not represent any investment advice or the official position of WazirX. WazirX reserves the right, in its sole discretion, to modify or change this blog post for any reason at any time and without prior notice.

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