“One cannot step into the same river twice.”
There was a collapse of UST before, and in the middle of last month, Brother Sun’s USDD also experienced a certain degree of price deviation.
Will USDD repeat the same mistakes? It is natural to think of this question. In the face of market concerns, USDD officials sent an open letter to systematically answer questions from the outside world.
Analyzing the content of an open letter may be more valuable than an emotionally driven response like watching the hype, wishing it down, FUD, etc.
The stablecoin species is crucial to the entire crypto ecosystem. Clarifying some basic facts and forming judgments will help us not be swayed by noise, and quickly understand the new narrative and gameplay of stablecoins, so as to obtain benefits within our own perception.
Considering the large content of the open letter, I will also try to make an interpretation here to help you quickly understand the design mechanism of USDD and the control measures in the face of price deviation.
Decoupling, the hallucination of deja vu
Before everything starts, when it comes to USDD, it is natural to think of TRX behind it. At the same time, due to preconceived impressions, everyone will feel that the relationship between LUNA and UST is similar to the relationship between TRX and USDD.
Obviously, there are some superficial similarities between the two:
●There is a local currency for endorsement;
● Both have set up a two-way minting/burning mechanism, using market arbitrage to make UST/USDD float around $1;
and, have faced “decoupling”. Everyone knows about the decoupling of UST, and the crash triggered a series of earthquakes in the circle; while USDD also decoupled to a certain extent (CoinGecko shows the lowest $0.94), but soon the price gradually returned to around 1.
Data source: CoinGecko
If you don’t think about it, it is easy to produce a series of suspicious logic and hallucinations:
Both of these two stablecoins are strongly correlated with the price of the local currency behind them—>the local currency itself has no value—>they have both been decoupled—>they are both unstable—>then history will repeat itself.
But, is this the truth? When LUNA/UST as a stable narrative has been shattered, what is the significance of USDD simply copying the UST mechanism? If you don’t look at the design details of USDD, it is easy to cause cognitive biases due to the illusion of decoupling.
The key to breaking this illusion is to understand what is “stability” in the design mechanism of USDD, what is the reason for “stability”, and how to deal with “unstable” situations.
Behind the Illusion: Analysis of USDD’s Stability Mechanism
● What is “stable”?
All design mechanisms of stablecoins essentially serve the word “stable”.
How to define stability is the first question that needs to be clarified. Judging from the official open letter given by USDD, it believes that stability is to allow USDD to fluctuate up and down 1 USD, rather than strictly maintaining 1:1 forever.
This actually makes it clear that stability does not mean that prices are set in stone. When the price of USDD is within a certain safe range (such as ±3%), the fluctuation of the price is regarded as a normal market behavior, which does not mean decoupling, nor does it mean that measures must be taken to recoup immediately. The relationship between supply and demand spontaneously adjusts price fluctuations.
Therefore, we can think that the price fluctuations of USDT / UST / USDD are normal, and you cannot require it to be completely equivalent to 1 USD all the time. In the event of a significant price change (decoupling), such as a market force shorting, or a large-scale sell-off caused by other circumstances, other feasible measures need to be taken to maintain the stability of the currency value.
What would this feasible means be? In most people’s minds, they will definitely think of the two-way minting/burning mechanism of algorithmic stablecoins: through market arbitrage, prices are spontaneously maintained in balance. But this mechanism is easy to think of LUNA / UST, and it is easier to one-sidedly discuss whether the TRX behind the stablecoin has a value endorsement.
When you put the idea of ”USDD stability is determined by the price of TRX”, the illusion mentioned above will occur.
●TRX/USDD two-way minting is only one of the means to maintain stability, not the essence
If you dig a little deeper, you will find that although TRX/USDD does embody an idea of maintaining the stability of USDD through two-way minting, it is very different from UST in practice. The key lies in the supply control and minting of stable coins. the openness of rights.
First look at the bidirectional casting design of LUA-UST. Since both of them can be completely minted/destroyed in the market, when a negative market occurs, it is very easy to go to a death spiral:
1. When the market goes bearish, LUNA falls;
2. Since UST is backed by LUNA, participants will be afraid that UST will be decoupled due to the decline in the value of LUNA, so they begin to sell UST;
3. When the free two-way minting design leads to an increase in UST selling pressure, arbitrageurs can buy UST at a price lower than $1 and mint LUNA worth $1, but this will lead to an increase in the number of LUNA.
4. Excessive LUNA further causes the value of LUNA to decline, and the death spiral begins, repeating the action of 1 above.
Interpretation from Twitter @WestieCapital
And now in the two-way minting of TRX and USDD, let’s see how things will change:
1. When the market goes bearish, assume that TRX falls;
2. The associated panic will believe that there is a strong correlation between the price of TRX and the stability of USDD, assuming that USDD starts to be sold;
3. When the selling pressure of USDD increases, the market cannot arbitrage freely at this stage. People other than the white-listed institutions identified by the Federal Reserve cannot burn and mint USDD less than 1 USD to sell TRX worth 1 USD. arbitrage.
4. Since the third walk is blocked, the subsequent series of death spiral effects may not occur. This means that uncontrolled market behavior cannot affect the supply of USDD and TRX at this stage. How to regulate USDD is mostly in the hands of the Federal Reserve Bank of Waves.
USDD is clearly learning from experience. Before UST de-anchored on May 9, the total market value of UST was 18.7 billion US dollars, and the total market value of Luna was 20.4 billion US dollars. From May 9th to May 14th, the supply of Luna increased to 18,000 times, while the price of Luna dropped to 0.018/10,000, and the total market value of Luna dropped to 3%.
At this time, as long as you are not a fool, you will understand that the surge in the supply of LUNA behind UST has no value, and UST naturally has no value.
The practice of tying the value of stablecoins to a local currency that can be freely minted in large quantities has been falsified.
USDD is not designed exactly along this line of thinking. Conversely, the Wave Fed can actively use this two-way minting and burning mechanism (TRX / USDD) or not. This is just one of the means of USDD regulation. The smart wave of the Federal Reserve actually has a lot of cards to play, so it will not put a clear card that has been learned from the past as a living target and let the market seize the loopholes and attack.
From the perspective of historical records, this analysis has been partially confirmed: before and after the decoupling of USDD in mid-June, the official records of the Federal Reserve Bank of Poland did not show that there was a record of burning USDD and minting it into TRX. Issue USDD.
The official website of the Federal Reserve Bank of China
●Excess reserves are the key to maintaining currency price stability
At present, the total issuance volume of USDD is about 730 million US dollars, and BTC+USDT+USDC+TRX is used as a reserve behind it. Its value is as high as 2.29 billion US dollars, and the collateral assets are about 3 times of the issued assets.
The official website of the Federal Reserve Bank of China
Let’s even consider a more extreme case: suppose TRX is worthless air and goes to 0 like LUNA. What will happen?
The fact is that in addition to TRX, the reserves of BTC, USDT, and USDC add up to about 1.4 billion US dollars, which is more than enough to meet the issued USDD of 730 million US dollars. However, USDD has been sold off in large quantities in the market, resulting in oversupply and decoupling. The Fed can use the reserves in its wallet address, which is much larger than the issuance of USDD, and buy USDD to make it re-coupling.
Having money is the last word.
Therefore, unlike LUNA/UST, TRX in USDD only accounts for about one-third of the total reserves, and the price of USDD has nothing to do with TRX. And as mentioned above, the right to exercise TRX/USDD is still firmly in the hands of the Fed, and the market cannot increase or decrease the circulation of TRX/USDD through free arbitrage. This means that the circulation of USDD is controllable + sufficient reserves. These two constitute a layered stability maintenance mechanism. USDD is not a calculation stability that simply imitates UST, but uses other synthetic assets to form an over-collateralized asset. stablecoins.
Reference for this picture: Twitter @danku_r Design ideas for USDD to increase BTC reserves
The only unstable part of this mechanism is that the Fed’s collateral BTC/USDT/USDC/TRX experienced a sharp price drop at the same time. At this time, the value of the overall collateral shrunk, resulting in the insufficient value of USDD.
Control means other than two-way casting
As mentioned above, in order to maintain the stability of USDD, in addition to two-way casting, the Federal Reserve Bank actually has a lot of cards to play. If the wave Fed is analogous to the Fed in the actual financial world, then this method can be understood as a monetary control policy.
From the perspective of the open letter, the regulatory policies around USDD include interest rate setting, open market operations and window guidance. Aside from these high-level professional terms, looking back at the brief decoupling event of USDD last month, you can get an intuitive explanation of these policies.
1. Use USDD interest rate adjustment
On June 13, the USDD price changed to $0.97. In the face of this slight price change, the Federal Reserve Bank raised the USDD pledge interest rate to attract more people in the market to return USDD to the protocol for pledge. So that its price automatically recovers.
Image source: https://0xilluminati.com, Review of USDD decoupling events
2. Open market operations
When there is a large price change in USDD, such as when the decoupling is 10% to around 0.9, according to the two-way minting mechanism, the Federal Reserve could burn USDD to mint TRX, and reduce the supply of USDD to make it hook back. But this move will also affect the price of TRX. Taking this into account, the Fed chose to openly buy 100 million USDC of TRX in the market. While responding to the short-selling of TRX in the market, it also increased the assets in the reserve to further deal with risks.
3. Window guidance
The explanation in the open letter is that in the face of extreme market conditions, the Fed will also cooperate with some market institutions (such as JustLend, CEX, etc.) to control the loan volume of USDD and TRX, and even close the loan of USDD and TRX to prevent Malicious shorting in the market.
Image source: Public information of the Federal Reserve Bank of Waves
The decoupling of USDD last month was triggered by the borrowing of a large number of USDD. From May 31st to June 1st, the wallet address TFehYK6usvtxWqDMQ3rXxGXmrA9LiFKJau successively borrowed 170 million USDD through JustLend , and then sold them on Kucoin. After this incident, we guessed that the Federal Reserve Bank of China and Brother Sun’s team should consciously prevent the first-hand large-scale lending. Most of the USDD and DEX currently in circulation are distributed in JustLend, sun.io’s 2/3 pools and Curve. If it is found that there is a large amount of abnormal behavior on its own lending platform, it will take the method of closing the function to further prevent the situation from worsening.
Between the virtual and the real: there is no clear sign of USDD regulation?
Looking back at the short-term decoupling of USDD last month, it is more like a game between the Fed and the market.
According to calculations, based on the market conditions at that time, the amount of funds needed to re-hook USDD from 0.9 to 1 US dollar is about 3.6 million US dollars. The total asset reserve value of the Federal Reserve Bank of Poland is more than 2 billion US dollars, which means that Brother Sun can hook USDD back at the touch of a finger.
Image credit: Twitter @0xSh1r0
But he didn’t do that, and USDD didn’t get pulled back to $1 quickly in a period of time. According to the theoretical calculation of the above netizens, a simple thing is not done, either the team is negligent or it is intentional.
And I prefer the latter. When USDD did not re-hook, the market reaction was mostly to recreate the illusion of UST decoupling. And the superior Sun brother even directly tweeted: “Don’t panic and stabilize, more funds are being deployed.”
In fact, as we have analyzed before, the relationship between TRX/USDD is not as close as that of LUNA/UST, not to mention that the minting power is still in the hands of the Federal Reserve Bank of Poland. Publicly revealing cards and not using the casting and burning mechanism to destroy USDD, all these actions are just false moves.
In particular, the topical Sun and the controversial USDD, the means of maintaining the stability of the currency value are unlikely to be as expected by the market. But between virtual and real means, I personally think that if USDD wants to grow bigger and become a stable currency with weight, then any of its means will not fall into the level of “conspiracy” or “cutting leeks”.
In the matter of USDD, Brother Sun is more like a gamer, mobilizing resources from all parties to jointly maintain the development of USDD.
Considering that there are different top market makers in the Wave Federal Reserve, maintaining the stability of USDD must be their common goal and core position. Cutting leeks is strong.
We can also see from the USDD’s open letter, “The guiding ideology of the Federal Reserve’s monetary policy is to give the market reasonable and limited information to ensure the stable expectation of the USDD currency value and gain the market’s trust; but it will also be disclosed in a limited way, so that the USDD’s Shorts and longs cannot predict the Fed’s next move based on this, avoiding price fluctuations and shocks to the market.”
At the same time, the letter also quoted the words of former Federal Reserve Chairman Greenspan: “If I seem unduly clear to you, you must have misunderstood what I said”. If you think you are interpreting the strategy correctly, then you must have misunderstood the strategy.
This wave of thousands of layers game, the good show may have just begun.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/interpreting-usdd-looking-through-the-decoupling-illusion-to-find-the-real-stablecoin/
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