On Wednesday, the Tron DAO Reserve, which oversees the USDD stablecoin, removed 12,000 Bitcoin worth $732 million from its collateral backing. This move has led to concerns about the stability and decentralization of USDD, a stablecoin governed by the Tron DAO Reserve.

Justin Sun, founder of Tron, has attempted to address these concerns by providing context around the collateralization practices of USDD. 

In a recent statement, Sun emphasized that the long-term collateralization rate for USDD exceeds 300%. This figure indicates that the stablecoin is backed by significantly more assets than its circulating supply.

Understanding Collateralization Rates

Collateralization rate is a measure of the value of assets backing a stablecoin relative to its issuance. Sun explained that despite the recent Bitcoin withdrawal, the USDD remains well-collateralized. 

According to USDD’s transparency page, the current collateralization ratio stands at approximately 230%. This means the value of the assets backing USDD is more than twice the value of the stablecoin in circulation.

Sun compared USDD’s mechanisms to MakerDAO’s DAI, another popular decentralized stablecoin. He highlighted that USDD’s system allows for the free withdrawal of collateral when it exceeds the required amount, and necessitates additional collateral or liquidation if it falls below a certain threshold. 

According to Sun, “This is part of the basics of DeFi 101.”

Sun’s Reassurances on USDD’s Stability

Sun acknowledged that the capital utilization of USDD is not highly efficient but emphasized that the long-term collateralization rate is robust. He stated:

"Currently, USDD has a long-term collateralization rate exceeding 300%, which means that the capital utilization is not very efficient." 

Sun also noted that the Tron DAO Reserve plans to upgrade USDD to enhance its competitiveness in the decentralized stablecoin market.

Shift in USDD’s Collateral Composition

The recent removal of Bitcoin from USDD’s collateral has altered the composition of its backing assets. The stablecoin is now primarily supported by Tether (USDT) and TRX. The transparency page of USDD shows that it holds $1.7 billion worth of TRX and USDT, providing a collateralization ratio of over 230%.

This new backing structure contrasts with other stablecoins in the market. For instance, DAI is collateralized at around 120%, while major players like USDT and USD Coin (USDC) maintain a 100% collateralization ratio. 

USDD’s Evolution and Decentralization Debate

USDD’s journey has been bumpy. Initially, it was undercollateralized, meaning its backing assets were less than the total USDD in circulation. 

Following the collapse of the TerraUSD stablecoin in 2022, USDD transitioned to an overcollateralized model to enhance stability.

The Tron DAO initially aimed to maintain a minimum collateralization ratio of 130%. However, critics like X user, Symbio argue that despite the stablecoin’s management by a DAO, significant changes like the Bitcoin withdrawal have occurred without apparent community approval.