A suspected selloff by Alameda Research results in USDD losing its dollar peg

Key points: 

• Whales dumped more than $11 million of the USDD in search of exposure to rival stablecoins USDT and USDC, which led to its depeg. 
• Justin Sun speculated that Alameda Research could be the one who dumped its dollar holdings to avoid bankruptcy.
• The collateral ratio of Tron DAO reserved is close to 113% compared to the 283% it stated.
• The current setup could lead to a further decline in TRX to the $0.022 to $0.030 range.

In April 2022, the Tron network launched USDD, a USD-pegged token, as an “overcollateralized stablecoin,” meaning it is less likely to fall below $1 due to the excessive reserves backing its valuation.

USDD stablecoin falls below the $1 peg

But fixing USDD’s price at $1 on Nov. 8 wasn’t enough, as some whales dumped more than $11 million of the token in search of exposure to rival stablecoins Tether and USD Coin. A day later, the price of USDD traded as low as $0.96 before recovering slightly to $0.98 on November 10.

Selling pressure was even more pronounced in the USDD liquidity pools in Curve’s decentralized finance journal. As of November 10th, the mining pool was severely out of balance, holding nearly 82.50% of USDD, with the rest being USDT, USDC, and DAI stablecoins.

Tron founder Justin Sun speculated that Alameda Research, a crypto hedge fund led by FTX’s Sam Bankman-Fried, could be the whale that dumped its dollar holdings to avoid bankruptcy. Alameda had a balance sheet made up of 50% FTT (FTX’s native token), which has recently fallen by more than 90%.

I think probably Alemeda just sold their USDD to cover the liquidity of ftx exchange. The pool currently is back with a healthy rate. pic.twitter.com/oSIzUNqE0Z

— H.E. Justin Sun (@justinsuntron) November 9, 2022

Miscalculated collateral reserve

USDD is issued by the Tron DAO Reserve (TDR), which is also the custodian of its collateral. The TDR is primarily responsible for selling collateral to maintain the dollar-to-dollar peg in the event of a sell-side shock.

In theory, USDD appears to be fully backed by a $2 billion crypto collateral pool in the form of Bitcoin, Tron, and USDC, with reserves, reportedly over 283% higher than stablecoin supply.

But there is a problem.

Currently, almost all stablecoin collateral is deployed in TDR's reserve wallet and generates revenue in JustLend, the largest lending protocol in the Tron ecosystem, through Total Value Locked (TVL). 99% of TRX collateral is now locked in staking governance contracts.

TDR also appears to have mistakenly put more than $725 million worth of burned TRX as collateral. In total, the DAO's liquid reserves are left with around $600 million worth of USDC and $236 million worth of BTC.

In other words, the collateral ratio is close to 113% compared to the 283% it stated.

Bitcoin, and TRX prices fall

USDD’s collateral ratio may continue to fluctuate as the price of its currency reserves, BTC and TRX, falls.

Notably, the price of BTC fell over 22% to around $16,500 for several weeks amid the crypto market crisis triggered by the Alameda FTX fiasco. On the other hand, TRX lost about 12% in valuation over the same period, trading at about $0.05 on November 10.

Tron coin is now poised to break below its confluence of long-term supports with its 200-week exponential moving average (200-week EMA; blue wave) near $0.052 and its 0.236 Fibonacci retracements near $0.055.

This could lead to a further decline in TRX to the $0.022 to $0.030 range (marked in red in the chart above). This area is a major consolidation channel from August 2020 to January 2021 and from January 2019 to July 2021.

Additionally, it acted as a backup from February 2018 to November 2018.

Meanwhile, Bitcoin has entered the breakdown phase of its dominant inverse cup-and-handle pattern and now has its main downside target at $14,000.