Tron ecosystem struggles with market conditions including another stablecoin depegging.
For the third consecutive day, Tron’s blockchain Decentralized USD (USDD) is trading for less than $1 and according to data from CoinGecko, USDD traded for as low as $0.95 within the last 24 hrs.
Issues began when USDD lost its 1:1 peg to the dollar. Since then, TRX has failed to stop the downtrend, crashing by over 40% in less than a week. So long as USDD continues to be below one dollar, TRX is likely to experience massive sell pressure to cover the gap.
USDD first lost its peg on June 13 amid a major decline that saw the market cap of the industry dip below $1 trillion. The sustained capitulation has led to comparison with Terra’s UST, which was also an algorithmic stablecoin; however, analysts have argued that USDD may not suffer the same fate as it is not as big as UST.
By deploying $2 billion, the TRON DAO Reserve likely plans to buy huge amounts of TRX in an attempt to create a “short squeeze,” forcing those short on TRX to buy back the underlying TRX tokens and ultimately giving arbitrageurs more runway to restore the USDD peg. However, this strategy is incredibly risky. If there is more money placing bets on the short side than the TRON DAO Reserve has on hand to buy up TRX, the token could continue to fall.
“Funding rate of shorting #TRX on @binance is negative 500% APR. @trondaoreserve will deploy 2 billion USD to fight them. I don’t think they can last for even 24 hours. Short squeeze is coming,” tweeted TRON founder Justin Sun Monday morning. At the time, USDD had dipped slightly below a dollar, trading at around $0.98. More than 24 hours and $2 billion later, it has still not been able to regain its peg.
If the price of TRX cannot be stabilized, the TRON DAO Reserve will need to deploy more reserve assets to help maintain USDD’s dollar peg. Currently, the DAO holds $10.8 billion TRX, 14,040 BTC, 140,000,000 USDT, and 500,000,000 USDC in reserve, providing a collateralization ratio of around 248% for the 723,321,764 USDD in circulation.
Also the Tron DAO Reserve, in its attempt to shore up the poor performance of TRX and USDD, has revealed that it would withdraw 2.5 billion units of TRX from Binance to “safeguard” the industry.
USDD uses an algorithmic mechanism to maintain a stable dollar value. When the stablecoin trades under $1, arbitrageurs can burn it for $1 worth of TRON’s native cryptocurrency, TRX. Conversely, when USDD trades above $1, arbitrageurs can swap $1 worth of TRX for one USDD, minting more USDD in the process and increasing its supply. It is worth noting that USDD’s algorithmic mechanism closely resembles that of TerraUSD, the failed stablecoin that entered a death spiral when it lost its dollar peg at the beginning of May, wiping out over $40 billion of value.
As arbitrageurs attempt to profit by swapping 1 USDD for $1 worth of TRX, it creates immense selling pressure on the TRX token. Since USDD started losing its peg, TRX has dropped 16.7%. As Sun noted in his tweet, the TRX funding rate on crypto exchange Binance is negative 500% APR, meaning that many traders have opened short positions on the token to profit from a potential further decline in value.
Many different indicators are showing the pressure mounting against the Tron ecosystem and stablecoin USDD, people will be watching closely after the chaos ensued from the Terra ecosystem especially governments and regulators.
Some Technical Indicators
Trading Volume: The tremendous selling pressure has crashed TRX price in a short amount of time. The selling volume remains very high at the time of this post.
RSI: The daily RSI has reached oversold conditions at 23 points.
MACD: The daily MACD is in freefall. The current negative momentum continues to intensify, and the histogram is making lower lows. This can be interpreted as very bearish.
