Brother Sun's "Dream of Stability": Wave Fed and USDD
Author:0x76
Author:
In this article, we analyze the stable project USDD launched by Sun Ge.
USDD is an algorithmic stablecoin project built on the TRON public chain platform and issued and managed by TRON DAO Reserve (TRON DAO Reserve, referred to as "TRON Reserve").
We don't need much introduction about Tron and its founders, so let's get straight to the point and summarize the basic logic of USDD.
To put it simply, USDD has basically copied Terra's UST stability model, but in the specific implementation of the model, many transformations with TRON characteristics have been carried out. We summarize these transformations into the following three points.
Three "Innovations" of USDD
1. Redefine "casting"
In Terra mode, users can obtain newly minted UST by the system by destroying Luna of the same value. Each transaction will call the minting function of UST to issue new UST to users and maintain the price stability of UST.
USDD does not adopt this model of relying entirely on code automation. According to the description in its white paper, the Federal Reserve Bank of Waves has pre-minted 999 billion USDD stablecoins before the project was issued, and deposited them in a multi-signature wallet called the Issuance Contract. The address of this wallet is: TRFGnuUqED3NDpMYgqZY1X3gAeVHNw1SDq, we will call it "address 1".
Afterwards, the Federal Reserve Bank of Wave will transfer the USDD to be issued from address 1 at a scale of 1 billion USDD each time to another multi-signature wallet address called Authorized Contract: TTsASxQhMk4t3S5vZMVVJ7nR2GQjDXNRnq, we will call this address "address 2" .
It can be seen that address 1 has undergone the first transfer of 1 billion USDD, and the current balance of address 1 is 998.9 billion USDD (900 million more than the balance stated in the white paper, I don’t know if it is a typo).
Of course, "Address 2" is not the final address for daily issuance of USDD. The 1 billion USDD here will be transferred to the next TRC20 Token address through a whitelist mechanism: TPYmHEhy5n8TCEfYGqW2rPxsghSfzghPDn, which we call "Address 3".
The balance of this address 3 plus the balance in the last Authorized Contract address is exactly the first batch of 1 billion USD transferred out.
Therefore, the USDD issuance officially disclosed by the Federal Reserve Bank, that is, the "minted" USDD, actually refers to the amount transferred to "Address 3", but the actual total USDD minted amount has reached 999.9 billion. Therefore, the total amount of USDD issued is not controlled by the algorithm, but is operated artificially through three multi-signature wallet addresses. Finally, through address 3, these printed USDDs are sold to whitelist traders and finally put on the market.
The USDD monopoly issuance model is rarely adopted by other Suan stable projects, but readers who are familiar with the USDT (Tether) issuance mode may feel familiar. Perhaps Sun Ge’s Suan stable also refers to this famous centralized stable currency to a certain extent release mode.
2. Redefine "destruction"
Similarly, the Federal Reserve has also innovated in the burning process of TRX. We know that in the Terra model, the minting of the stablecoin UST must destroy the equivalent Luna tokens, so the issuance process of UST is also the process of reducing the circulation of Luna. Therefore, for USDD, which directly imitates UST, TRX needs to be destroyed when USDD is issued.
Let's take a look at how the USDD destruction process is performed. On the official website of the Federal Reserve Bank of Wave, we can find an address called the TRX destruction contract: TNMcQVGPzqH9ZfMCSY4PNrukevtDgp24dK.
After opening it, I found that all TRX burned during the process of minting USDD were entered into this address called MultiSigTRXBurn.
Note that this address is not a black hole address, but a multi-signature wallet named TRXBurn. As long as the TRX entered into this wallet is signed by 5/7 multi-signature holders, the funds in it can be transferred out. In other words, these TRXs have not been destroyed from the beginning to the end, and the total circulation of TRX has not really decreased due to the issuance of USDD. It's just transferred from the user's hands to another multi-signature wallet controlled by the Federal Reserve Bank and named "TRX Destruction".
In other words, while the Federal Reserve directly minted 999.9 billion new USDD, the total flow of TRX did not decrease in any way.
This approach is barely understandable from another angle. For this kind of public chain with stable currency function added later, the biggest problem is that the monetary policy originally formulated by the public chain cannot be easily modified. Using these destruction mechanisms simulated by multi-signature wallets can also be used before the public chain is completely upgraded. Said it was a helpless move.
However, this practice of replacing the automatic execution of the algorithm by manual manipulation undoubtedly brings new risks to the entire stablecoin system, which we will mention again in the last part of the article.
3. Redefine "algorithm stability"
The current mainstream stablecoins, whether they are Suanwen represented by UST, or USDC, a fully mortgaged stablecoin, all rely on arbitrage activities in the primary market to maintain their price stability.
That is to say, even if the secondary market loses confidence in the stablecoin and no one is willing to take it from you at a price of $1, the holder can still exchange the stablecoin in his hand for other equivalents in the primary market. Assets, and this is the fundamental reason why the market can trust a stable currency.
For USDC holders, they can convert USDC into an equivalent of 1 US dollar in the primary market, so the credit of USDC comes from Circle's official full reserve. For UST holders, UST can be exchanged for Luna tokens worth 1 USD in the primary market. The credit comes from Luna’s unlimited minting rights, and this mechanism consists of the chain code and the consensus of the Terra public chain. to guarantee.
But without exception, the primary markets of these stablecoin projects are open and freely convertible to all currency holders, because this can guide the spontaneous arbitrage activities in the market and maintain the stability of stablecoin prices.
However, USDD has closed the primary market of free exchange for ordinary currency holders. Specifically, the Federal Reserve has implemented a whitelist access mechanism in the USDD primary market. At present, according to official information, institutions such as Alameda Research and Amber have obtained the qualifications for this white list. But please note that these well-known institutions are not endorsing the credit of USDD, they just obtained the primary market trading rights that each holder originally had in UST.
Holders of ordinary USDD can only trade in the secondary market at present. Therefore, even if the future price of USDD is unanchored, holders can only sell USDD to the secondary market, but cannot directly request the Redemption Reserve Assets of the same amount from the Federal Reserve Bank.
Therefore, the stability mechanism of USDD can be said to have nothing to do with the algorithm, but directly related to the conduct of the Federal Reserve Bank or the whitelist institutions approved by them.
What is the essential difference between USDD and UST?
To put it simply, the USDD model is based on completely inheriting the basic model of UST, and transforms the "Code is law" at the core of the algorithmic stablecoin into "Federal Reserve is law". The issuance and destruction of USDD, as well as the key arbitrage activities in the primary market, have all been adjusted from relying on automatic code completion to being approved by the Federal Reserve, the authority.
The core of the USDD model is to transform the openness in the spirit of the blockchain into a closed one, and transform trust minimization into trust maximization (users need to fully trust the Wave Fed).
Therefore, we need to re-examine what additional risks this UST imitation disk modified by Sun Ge has, compared with the original UST.
Compared with UST, what risks does USDD increase?
1. Moral Hazard
Since the key links such as the casting, issuance, and destruction of stablecoins have been completely controlled by the Wave Fed, whether this mechanism can operate stably as expected has changed from a code-controlled trustless model to one that requires complete reliance on Wave Fed operations. Strong trust model.
Although the key accounts mentioned above all use 5/7 multi-signature wallets on the chain, the management of these 7 independent wallets needs to be completed off the chain. In other words, we only know that these are 7 independent addresses, but we cannot confirm whether these 7 addresses are controlled by 7 independent individuals, or whether one person directly controls the 7 wallets.
Regarding the management rights of multi-signature wallets, we have not found any publicly disclosed information. We hope that readers who know more can contact us.
2. Manage risk
Even if we assume that the Federal Reserve Bank created by Sun Ge has no moral hazard, the stable operation of USDD still needs to overcome great management risks.
To give a recent example, the vulnerability of about $600 million in assets stolen from the Ronin wallet, the main problem lies in the off-chain management of the private key of the multi-signature wallet rather than on-chain logic. If some hacker organization targets the USDD reserve pool and steals enough private keys of multi-signature addresses, nearly 1 trillion minted USDD may flow directly to the secondary market, and the funds of all USDD trading pairs Pools will be drained quickly.
Of course, the Federal Reserve has taken a certain degree of prevention against this risk. For example, the funds in address 2 need to go through a 10-day cooling-off period before they can be transferred out. But all these remedial measures are still increasing the trust cost of users.
3. Risk of undercollateralization
For the USDD model, the biggest risk still comes from the price drop of TRX, which is not enough to fully meet the redemption demand of all issued USDD. Without the guarantee of unlimited minting rights like Luna in UST, USDD still needs to make excess reserves to cope with the decline in TRX prices.
It is mentioned in the white paper (see screenshot) that the Fed will raise $10 billion as a reserve within 6 to 12 months. The money appears to have yet to arrive. And even if it arrives, I am afraid it will still be placed in a multi-signature wallet that is actually controlled by no one knows.
It can be seen that USDD has modified the UST model with the goal of maximizing trust from the beginning to the end. And this kind of management method of maximizing trust, at best, increases the team's control methods. At worst, it is also easier for the team to manipulate the market at will.
Of course, we believe that the Federal Reserve Bank, which has dared to directly compete with the Federal Reserve in terms of naming, will not be so bottomless in the subsequent operation process.
Finally, I would like to remind you that although USDD has produced an audit report issued by SlowMist, the current audit report can only confirm that the code of the project has realized the business logic required by the team, but it is often impossible to express whether there are various risks in the business logic itself. Opinion. Therefore, in many cases, the audit report can only be used as a limited reference, and auditing cannot be equated with absolute security.
