Both Tron's USDD and Tether USDT Suffer Depegs from the USD

over 1 year ago

Amid all the turmoil in the crypto markets caused by the ongoing FTX debacle, in recent days, both Tron's USDD and iFinex Inc's USDT lost their respective US Dollar pegs.

First it was Tron's USDD that lost it's peg starting on November 8, 2022. A review of the 7 day price chart for USDD demonstrates this loss of peg dramatically:

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On November 8, 2022, some whales dumped 11 million USDD in order to seek exposure to stablecoins in the form of Tether (USDT) and USD Coin (USDC) pressuring the downward price movement (peg break). On November 9, 2022 the price of USDD fell as low as $0.96 thereafter posting a modest recovery to $0.98 on November 10, 2022. [See, e.g. Gola, Y. Tron’s stablecoin USDD loses dollar peg on suspected selloff by Alameda Research. (Accessed November 10, 2022)].

As of the writing of this article (November 10, 2022 at 11:57 ET), USDD price per CoinMarketCap is $0.975, still below peg.

Tron founder, Justin Sun has posited that the whale dump on November 8, was speculated to be Alemeda Research, the crypto hedge fund headed by FTX head Sam Bankman-Fried. His reason given was to dump it's USDD holdings to avoid insolvency as the balance sheet of Alemeda supposedly held 50% FTX.

The USDD stablecoin is issued by the Tron Dao Reserve (hereinafter, TDR). TDR likewise serves as the custodian of the collateral backing the USDD stablecoin. And in the event of a sell-side shock TDR is charged with the responsibility of selling collateral to sustain the peg.

Theoretically, USDD appears to be backed by sufficient collateral. This collateral is supposedly held in the form of cryptocurrency - approximately $1.53 billion in Bitcoin, Tron and USDC. If in fact this is the case, the reserves would outweigh the stablecoin supply by more than 210%.

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So, why is the USDD stablecoin still depegged?

Well... maybe Justin's so called collateral isn't as liquid as he would have the public think. Seems that 99% of the Tron collateral is locked away inside the protocol's staked governance plan. Furthermore almost all of the collateral held in the TDR wallets is staked away earning the DAO yield in JustLend.

Interestingly, and to make matters worse, the TDR is incorrectly including over $$725 million in Tron that has been burned as collateral. Accordingly, the correct amount of collateral reserves should be $685,806,954 ($243,483,494 BTC reserves and $ 442,323,460 USDC reserves). If my calculations are correct, this leaves approximately $39 million USDD uncollateralized !

Even if my calculations are incorrect, the nature and status of the alleged collateral suggests that the collateral ratio is far below the boasted 209.52%. And I will not discuss, but merely mention that this collateral ratio may be further eroded by crypto's falling market prices plagued by the continuing crypto winter.

So, while Alemeda Research may have been the cause of USDD depeg, the failure to the TDR to act in accordance with its mandates lead the depeg status of this stablecoin to continue.

Now turning to Tether. Apparently Tether has followed USDD in depegging as a result of possible shorting of FTX and Alemeda Research. Earlier this morning (November 10, 2022), Tether lost its Dollar peg, but seemingly has recovered trading at $1.00 at this time (November 10, 2022 at 13:11 ET). This depeg is clearly visible on the 1 day price chart of USDT from CoinMarketCap:

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Relevant data displayed USDT reaching lows of $0.971 on Bitstamp with fears that the stablecoin may fall further. These fears were fueled as a result of evidence (see Etherscan) showing FTX as well as Alameda Research attempting to short Tether. Moving in the direction of the Terra/UST debacle, both FTX and Alameda Research are running afoul of the crypto community at large and beyond. [See, e.g. Suberg, W. Analysts urge calm as Tether depegs from USD, Bitcoin loses $17K rebound. (Accessed November 10, 2022)].

Nonetheless, Paolo Ardoino, Chief Technology Officer at Tether, urged all to be calm commenting on the price moves throughout the morning hours, tweeting:

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In a blog posting dated November 9, 2022, Tether rendered its official stance on the FTX-Alameda situation:

[W]e would like to confirm that at this time, Tether has absolutely no credit towards FTX or Alameda Research. Tether is completely unexposed to Alameda Research or FTX. Tether tokens are 100% backed by our reserves, and the assets that are backing the reserves exceed the liabilities. Tether holds a strong, conservative, and liquid portfolio, which includes cash, cash equivalents and U.S. Treasuries. Tether will continue to focus on safeguarding those reserves as it has done for years. While the situation with FTX has caught many people by surprise given their reputation and size, FTX is not indicative of the practices of all substantial players in the industry. Tether has been committed to, and has delivered on its commitments, strengthening its balance sheet and improving the quality and liquidity of its collateral wherever possible.

[Tether. FTX, Black Swans, and Tether's Continued Stability. (Accessed November 10, 2022)].

And in response to this loss of peg by USDT, popular analyst @DU09BTC tweeted:

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