Tron DAO loses Bitcoin backing, Justin Sun cites 300% collateralization as the reason

The Tron DAO Reserve moved out 12,000 BTC worth around $730 million at press time. Tron founder Justin Sun noted the over-collateralization of Decentralized USD (USDD) as the reason for the withdrawal.

The Reserve is in place to stabilize the Tron network, the USDD stablecoin, and the broader crypto market. Before BTC was moved out from the Reserve, its collateralization rate was of 300%.

Tron Reserve moves 12000 Bitcoin 

12,000 BTC, having a market value of close to $730 million at press time, was moved out of Tron DAO Reserve. The Bitcoin reserve was backing the Tron-based USDD stablecoin. However, Arkham intelligence finds that the BTC moved to HTX. At press time, the centralized exchange shows a balance of close to 8,000 BTC, valued at under $500 million.

The Tron DAO Reserve by the TRON network aims to safeguard against panic trading and market downturns. At the time of writing, the total market cap of Tron-based stablecoins, which includes USDT, USDC, TUSD, USDJ, and USDD, stands at over $62 billion. Out of this, the USDD supply is around $745 million.

Notably, the Tron Reserve stabilizes exchange rates of both centralized and decentralized stablecoins. And the removal of a large amount of Bitcoin has left the market curious. Meanwhile, Justin Sun has compared the mechanism of Decentralized USD (USDD) to MakerDAO’s DAI, calling the market reaction  “not mysterious.”

Over-collateralization leads to USDD removal

Tron founder Justin Sun wrote, “When your collateral exceeds the amount specified by the system (usually between 120%-150% depending on the vault), any collateral holder can withdraw any amount freely without anyone’s approval.”

USDD is a decentralized stablecoin. To put it simply, USDD holders have put up some collateral to back up the value of the stablecoin and keep it steady. The Reserve also maintains the Peg Stability Module (PSM) to maintain USDD’s stability by facilitating swapping between USDD and other stablecoins at a 1:1 ratio without slippage.

Sun explained that the amount of collateral should be slightly more than the value of the stablecoin to provide an extra cushion to price drops. The Tron founder said that the buffer is usually between 120% and 150% and is often considered short under 110%. A shortfall also leads to stablecoin holders withdrawing their collateral as the asset is not backed sufficiently, leading to liquidation. Contrarily, stablecoins can be over-collaterized if the funds are not put to use. Sun blames USDD’s long-term collateralization rate of 300% for the withdrawal.

Tron Reserve has a total collateral of $1.7 billion with USDT making up $19 million of the collateral and the rest, Tron TRX. Accepting that the “capital utilization is not very efficient,” Sun points to a future spending plan by Tron DAO.

Last week, USDD lost the sixth spot to PayPal’s stablecoin PYUSD in terms of stablecoin market cap. As per CoinMarketCap data, USDD is the 81st crypto based on capitalization.