USDD Removes $732M Bitcoin Backing, Reigniting Decentralization Concerns

The Tron DAO Reserve, which manages the USDD stablecoin, removed some $732 million worth of Bitcoin backing the stablecoin Wednesday, fuelling concerns that the entity isn't as decentralised as it claims to be.

The Tron DAO Reserve, which manages the USDD stablecoin, has removed some $732 million worth of Bitcoin (BTC) backing the stablecoin, according to data from X Wednesday.

The move comes as USDD, which is pegged to the US dollar, has been facing increasing scrutiny over its backing assets and claims of being decentralised.

With the recent removal of some 12,000 BTC, USDD’s backing has shifted almost entirely to TRX, the volatile native token of the Tron blockchain.

However, Tron founder Justin Sun has downplayed the concerns, stating that the Tron DAO Reserve would adjust the backing assets based on the “collateral factor.”

According to Sun, USDD has a long-term capital utilization rate of over 300%, which prompted the DAO to optimize the capital utilization by reducing the BTC-backed portion.

The USDD website currently shows a collateralisation ratio of 230%, indicating that the value of assets backing USDD is more than twice the value of the stablecoin in circulation.

Launched in 2022, USDD is an algorithmic stablecoin pegged to the US dollar and claims to be decentralised, being managed by a decentralised autonomous organisation — or DAO.

But the recent removal of some 12,000 Bitcoin backing USDD raised eyebrows because despite advertising USDD as being managed by a DAO, no vote was approved.

Is it really decentralised?

USDD has a rocky history.

The stablecoin was initially undercollateralised, meaning that the value of its backing assets was less than all USDD in circulation.

When the Terra blockchain’s undercollateralised TerraUSD stablecoin collapsed in 2022, USDD switched over to an overcollateralised model.

At the time, the Tron DAO said it planned to maintain a minimum collateralisation ratio of 130%.

This change, as well as several others, were not put to votes, as is commonplace among DAOs. The USDD website lists only a single DAO vote — a May 2023 proposal to use TRX tokens from the stablecoin’s reserve in Tron governance.

USDD has attracted several prominent critics.

Stablecoin rating agency Bluechip gave USDD its lowest rating, and strongly advises against using it.

Bluechip’s assessment of USDD said the wallet containing the Bitcoin that previously backed it was claimed by Huobi exchange as their own.

The stablecoin rater also criticised USDD’s mechanism.

“USDD has practically useless short term stability mechanisms and a theoretical long term mechanism that is yet to be seen in action,” it said,

Sun said in his Thursday X post that USDD’s mechanism is “not mysterious,” and compared it to that of MakerDAO’s DAI stablecoin.

He also hinted at future upgrades that may address some of the USDD criticism.

“The Tron DAO Reserve plans to spend time upgrading USDD in the future to make it a more competitive decentralised stablecoin in the market,” Sun said.

USDD did not immediately respond to a request for comment.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.