Can Justin Sun Afford to Pay 30% APY on Tron’s Stablecoin?

Can Justin Sun Afford to Pay 30% APY on Tron’s Stablecoin?
Justin Sun (Image: Wikimedia Commons)
22 April 2022

As the war for stablecoin dominance heats up, a new contender has entered the fray – Justin Sun, founder of Tron, announced in an open letter on Thursday that the USDD (or Decentralized USD) – an all-new stablecoin – will be launching on the Tron blockchain.

The news caused the price of Tron’s TRX token to surge over 15% and reach a three-week high. It currently trades at US$0.06972.

USDD, set to launch on 5 May, will not rely on any centralized institutions for redemption, management, and storage. Instead, it will achieve full on-chain decentralization. USDD will be pegged to the underlying asset, TRX, and issued in a decentralized manner, Sun said.

The stablecoin will operate with a similar mechanism to Terra’s UST. Sun said users will be able to redeem 1 USDD for 1 USD worth of TRX when the stablecoin drops below its peg. They can do the opposite if the price of the stablecoin rises above its $1 peg.

Tron also intends to raise a reserve of $10 billion, and the Tron DAO Reserve will set its basic risk-free interest rate to 30% annual percentage yield (APY).

The announcement has already stirred up controversy in the crypto community. Sun’s project, with mint and burn mechanics, mirrors that of Luna (Terra), which is also building up its reserves of Bitcoin to the tune of $10 billion to back its own UST stablecoin. USDD’s four-stage roadmap – “Space,” “International Space Station (ISS),” “Moon,” and “Mars” – also recalls Terra’s outer space imagery.

Unsustainable returns?

If successful, USDD will provide its users with the largest APY for staking a stablecoin in the crypto ecosystem, surpassing Terra’s Anchor Protocol’s 19% APY, and the upcoming NEAR’s 20% APY, if it launches.

But are such high rates sustainable in the long run? Even Anchor recently revised its returns for staking Terra, as concerns over the rate’s sustainability have surfaced, after Anchor’s community noticed the protocol was burning its yield reserves at a faster speed to maintain the high yield.

A drop in rate will prompt a drop in UST demand, which means that the stablecoin’s ability to maintain its peg could be at risk. With Terra’s new proposal, the protocol’s payout rate change will be capped at 1.5%. Payout rates would increase by 1.5% if yield reserves increase and decrease by 1.5% if yield reserves fall by 5%.

Blockhead Team
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