I check regularly Defillama to see movements of money on chains.
Today, I see Tron Chain has gone up 14.78% in TVL.
Once I go and check the protocols I see JustLend as the top protocol within the chain.
Within the protocol, I see that USDD (a stable coin) is providing 19.94%. Now, i understand that this is a lending protocol and therefore the people that are borrowing will ultimately pay for this interest. Given what has happened this week with the whole debacle of UST and Luna, I decided to take a read into its whitepaper.
Now, onto point 5 in this whitepaper:
” Adjustment of short-term price fluctuation
The USDD protocol runs on the TRON network, of which TRX is the native token and the most natural defense against USDD price fluctuations. The USDD protocol uses TRX as the base currency to price USDD. The USDD protocol maintains the market price of USDD around the target price regardless of market conditions using the following method:
● When USDD’s price < 1USD, users and arbitrageurs could swap 1USDD to 1USD worth of TRX in the protocol. When 1USDD = 0.9USD, an arbitrageur can buy 1USDD with 0.9USD in the external market and then swap 1USDD for 1USD worth of TRX in the system. After that, the arbitrageur can sell 1USD worth of TRX in the external market at 1USD. In this way, the arbitrageur spends 0.9USD to get 1USD, and earns 0.1USD without taking any risks. As a result of the above arbitrage, 1USDD will be burned, and 1USD worth of TRX will be minted. As the supply of USDD decreases, USDD’s price will increase, to the point where there is no room for arbitrage and 1USDD re-equates to 1USD.
● When USDD’s price > 1USD, users and arbitrageurs could swap 1USD worth of TRX to 1 USDD in the protocol. When 1USDD = 1.1USD, an arbitrageur can pay 1USD for TRX of the same value in the external market and then swap 1USD worth of TRX for 1USDD in the system. After that, the arbitrageur can sell 1USDD in the external market at 1.1USD. The arbitrageur spends 1USD to get 1.1USD and earns 0.1USD without taking any risks. As a result of the above arbitrage, 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. ”
How is this different from Luna/UST?
USDD has a market cap of 300M$ at this point. It isn’t the same market cap of Luna/UST, and therefore, it wont have the repercussions in the market as the whole value gets depleted, however, still has the potential of liquidating holders if the principles are the same.