TRON 101 | What Is an Over-Collateralized Stablecoin?


On June 5, TRON’s USDD was upgraded to a decentralized over-collateralized stablecoin, making a big splash in the crypto market. You may know well about stablecoins, but the term over-collateralized stablecoin just does not ring a bell. And that’s exactly what we are going to explain in this article. 

As we all know, stablecoins are cryptocurrencies that maintain a stable exchange rate with a reserve asset. They fall into three categories based on how the stablecoin is collateralized: 

1. Fiat-collateralized, such as USDT, USDC, TUSD; 

2. Crypto-collateralized, such as DAI, MIM; 

3. Non-collateralized (Algorithmic), such as FRAX, USDN. 

Fiat-collateralized stablecoins are the most widely known type. USDT, for example, is issued by Tether and collateralized by U.S. dollar assets, and the company claims that each USDT is backed by $1 of collateral. However, there has long been a question mark over whether USDT, a stablecoin issued by a centralized company, is fully backed by its U.S. dollar reserves. 

As such, decentralized stablecoins began to emerge. The difference lies in that these stablecoins are backed by cryptocurrencies. As cryptocurrencies are prone to volatile price swings, crypto-collateralized stablecoins, therefore, require over-collateralization, hence the name over-collateralized stablecoins.

In fact, over-collateralization is a common concept in traditional finance. For example, when buying a house with a mortgage, the house may be worth $2 million but we end up taking out a $1 million loan, and that’s a case of over-collateralization. 

In the context of an over-collateralized stablecoin, the collateral and the loan are $2 million worth of crypto assets and $1 million stablecoins, respectively, echoing the house and fiat currencies in the example given above. Based on the calculation formula, collateral ratio = value of the collateral/value of the loan taken out, the collateral ratio in this case is 200%.

The collateral ratio is critical to over-collateralized stablecoins. In general, the higher the collateral ratio, the more stable, securer, and less likely to be liquidated the stablecoin is. Let us come back to the example of a house mortgage; it is much safer to take out a $1 million loan than a $1.5 million one on a property worth $2 million.

However, low capital utilization rate and liquidation efficiency are common problems facing over-collateralized stablecoins; also, users who repeatedly take out stablecoins with over-collateralized assets result in higher leverage and put their assets vulnerable to risks in the case of extreme market conditions. The collateral auction incident of DAI on March 12, 2020, has proved that the project is highly fragile.

In contrast, USDD, backed by over-collateralized cryptocurrencies, works with the TRON DAO Reserve (TDR) to maintain a high collateral ratio while achieving a high capital utilization rate. Currently, the power of minting USDD is kept in the hands of white-listed institutions of the TDR rather than the users. In other words, the TDR shields users from the risk of market volatility while ensuring a high capital utilization rate and users’ asset security.

The latest stats show that the USDD reserve now holds 14,040 BTC, over 10.9 billion TRX, 1 billion USDC, and 150 million USDT, with a total of over $2.33 billion worth of assets collateralized for 739 million USDD, an extraordinary collateral ratio of 318.2%.

In conclusion, all users are welcome to try out USDD, the most robust, secure, and transparent stablecoin in the market.