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The most recent news concerning Justin Sun's USDD stablecoin has the cryptocurrency community somewhat worried as liquidity on the Tron's stablecoin might get much thinner. Approximately 12,000 BTC that were held in reserve for USDD were recently moved to HTX, formerly known as Huobi.
To put things in perspective, USDD is a stablecoin that is intended to keep a 1:1 peg with the U.S. dollar. Its stability has been called into question, though, by the recent adjustments to its reserves. Currently, there are about 745 million USDD in circulation overall, with a reported collateral value of $1.723 billion. At first glance, this appears comforting, but here is where things might get murky: roughly 98.8% of this collateral is supported by 10.93 million TRX, or roughly $1.703 billion.
According to Tron DAO Reserve, about 12,000 BTC used as USDD reserves have been removed recently and all flowed into HTX. The current supply of USDD is about 745 million, with a collateral value of $1.723 billion, but about 98.8% of it is backed by 10.93 million TRX ($1.703…
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Although TRX is a valuable asset, its volatility remains a major concern. This implies that the main source of support for a stablecoin - which by definition should be stable - is now something whose value is subject to large fluctuations.
A liquidity crunch could result from heavy selling pressure on USDD, which would make it impossible for the stablecoin to maintain its peg because of the volatility of the asset that supports it.
Any collateral holder can withdraw any amount freely without anyone's approval when your collateral exceeds the amount specified by the system, said Justin Sun in response to worries of the community. Given that USDD's long-term collateralization rate is more than 300%, its capital utilization is inefficient.
The removal of BTC reserves and reliance on TRX could be viewed as a risky move, even though Sun's remarks indicate that the system has a strong collateralization rate.