The "revolution" promised by Justin Sun of Tron looks like a clone of Terra's algorithmic stablecoin

The "revolution" promised by Justin Sun of Tron looks like a clone of Terra's algorithmic stablecoin

Tron, a blockchain competitor to Ethereum, is the latest company to launch an algorithmic stablecoin inspired by the success of Terra's UST. Tron has lofty goals for USDD, but not much else.

Tron, the blockchain founded in 2017 by entrepreneur Justin Sun to compete with Ethereum, will release its algorithmic stablecoin called decentralized USD (USDD) on Thursday.

But already, critiques are piling up from crypto analysts who have glimpsed early details of the project and say it largely looks like a copy of the Terra blockchain's fast-growing stablecoin, UST.

"It's mechanistically similar to Terra's UST in terms of minting and price stability," said Dustin Teander, an analyst at digital asset data platform Messari. Kevin Zhou, co-founder of hedge fund Galois Capital, called it a "LUNA clone," and Alex Kruger, a prominent crypto analyst, echoed his sentiments in a tweet.

Algorithmic stablecoins - cryptocurrencies whose price is linked to another asset, usually the U.S. dollar, through a pre-programmed or "algorithmic" incentive mechanism - are suddenly all the rage in the crypto world. The outstanding balance of Terra Blockchain's stablecoin, UST, has risen from $2 billion to $18 billion. This is partly due to the current financial environment, where inflation is high, the Federal Reserve is raising interest rates, and investors are looking for high yields. Stablecoins like UST can in many cases be parked in blockchain-based protocols or deposited with crypto lenders for high yields.

Many emerging market players have taken note of UST's rapid growth; Tron is just the latest.

What we know so far

Tron says it also plans to raise $10 billion for TronDAO, a reserve that could theoretically help maintain the dollar peg in a potential market turmoil.

In an April 21 open letter, Sun, the founder and former CEO of Tron, said that "TRON is launching a self-imposed revolution by pooling all its resources to create USDD, a fully decentralized stablecoin backed by mathematics and algorithms that will take stablecoin development to the next level."

According to USDD's whitepaper, the peg is maintained by creating and destroying USDD offers through a coin and burn mechanism and an arbitrage swap.

When the USDD price falls below $1, users can buy $1 USDD in the external market and then swap $1 USDD for TRX worth $1 guaranteed. As a result of the arbitrage, 1 USDD is burned and TRX worth $1 is minted. Theoretically, as the supply of USDD decreases, the USDD price increases to the point where there is no more room for arbitrage.

Similarly, if the USDD price is above $1. Then users can exchange $1 worth of TRX tokens for 1 USDD in the log. In this way, 1 USDD is minted and $1 worth of TRX is burned, expanding the supply of USDD until the price drops to the peg.

The whitepaper also reveals the TRON DAO Reserve, "the first decentralized reserve in the blockchain industry."

Sun said in the open letter that the reserve "aims to protect the entire blockchain industry and crypto market, prevent panic trading due to financial crises, and mitigate severe and long-term economic downturns."

The white paper states that "once established, the TRON DAO Reserve will set its risk-free prime rate at 30% per year and facilitate other decentralized and centralized organizations that accept USDD to implement consistent interest rate policies."

Check out the Terra playbook

Does any of this sound familiar?

The USDD and TRX arbitrage swap mirrors the way Terra maintains the UST stablecoin's peg to the blockchain's native token, LUNA.

The Tron DAO is similar to the Luna Foundation Guard reserve that backs the UST stablecoin. It is $2 billion with a goal of raising $10 billion.

And the "risk-free" - as the white paper puts it - 30% annual return is a tool to drive demand for USDD, just as Anchor, a savings and loan protocol on the Terra blockchain, drove demand for Terra's stablecoin with a 20% annual return on deposits in UST.

The launch of the algorithmic stablecoin Tron this week will mark the first step of a four-step roadmap for USDD, officials said. The full launch is expected to be completed by the end of the year.

Not much else has been determined at this point.

"It's not clear, for example, what asset the $10 billion in reserves will be in or how or when they will be used in the system," Teander said.

Tron did not respond to multiple requests for comment.

Tron's lackluster track record

So to achieve USDD's lofty goals, Tron needs to get users on board quickly. How has it fared in the last five years of its existence?

"Historically, Tron has lagged behind other ecosystems in developing consumer applications," Teander said.

Data from decentralized finance platform DefiLlama shows that most of the money stored on the Tron blockchain is not being used. There is $4.37 billion deposited on the Tron blockchain - in cryptocurrency terms, the total value is locked up - and the three largest protocols (JustLend, JustStables, SunSwap) account for almost all of the deposits.

JustLend, the largest of the three protocols, has $1.9 billion in deposits but only $67 million in loans, meaning that only 3.5% of the funds are actually used. JustStables, a DeFi system that already issues a dollar-linked stablecoin (USDJ) on Tron, has $1.3 billion in deposits, but only $288 million in stablecoins have been minted. And SunSwap, the third largest protocol, has very little activity outside of trading TRX, Tron's native cryptocurrency.

As is well known, Terra's return platform Anchor offers an annual return of up to 20% on deposits, a subsidized rate that is not sustained by loan revenue and relies on external sources to sustain payouts.

Tron aims to outperform Terra by initially offering a 30% annual rate of return on USDD deposits.

"A 30% risk-free rate is a high rate to maintain," Teander said. "Especially if there is no organic revenue to partially offset the cost."