Revealed: Why does USDD's 'excess collateral' fail in certain extreme situations?
Imagine that you hire a bodyguard to protect your assets, but the bodyguard's salary is completely paid by your family's stock. When your company faces a crisis and the stock price plummets, not only do you lose wealth, but you also find that your bodyguard chooses to go on strike because they can't receive a valuable salary, and even sell your stocks to cash out. This is exactly the structural collapse that the USDD 'hybrid collateral' stablecoin may face under extreme stress testing. In the highly differentiated market environment of 2025, we must reassess those excessive collateral data written in the white paper and penetrate that seemingly indestructible digital armor.
The core mechanism of USDD is a 'hydraulic system' known as the PSM (Peg Stability Module). Its original intention is to maintain a rigid peg to 1 dollar by collateralizing **BTC**, **TRX**, and other stablecoins. On paper, the collateralization rate of USDD often stays above 200%, which psychologically gives holders a sense of security, as if each USDD is backed by double the assets. However, this sense of security is often an expensive illusion during financial crises. Because the value of assets is static, while liquidity is dynamic.
First, we need to break down the components of the collateral. When the collateral includes a large amount of **TRX**—which is the system's own native token—it creates a self-reinforcing 'logical black hole'. During booming market periods, the price of **TRX** rises, and the collateralization rate appears terrifyingly high, allowing the project to expand aggressively. But once a black swan event occurs, the liquidity of **TRX** will quickly dry up. When USDD faces massive redemption pressure, the system has to reduce its collateral to maintain the price; if it sells **BTC**, it can sustain itself, but if it is forced to sell **TRX**, it will trigger a price crash. This 'self-cannibalization' phenomenon was rehearsed during the collapse of UST; although USDD has added **BTC** and **ETH** as buffers, in extreme systemic risk, the correlation between assets will tend to 1 in an instant, causing what appears to be a diversified asset pool to become as flimsy as a piece of paper in the face of liquidity collapse.
Secondly, we need to pay attention to the so-called 'liquidity trap'. In the on-chain data of 2025, we can find that a considerable portion of the excess collateral assets of USDD is locked in long-term treasuries or low liquidity lending protocols. Under pressure, the 'active assets' that can be instantly liquidated and injected into the market to maintain price are often less than one-third of the nominal amount. It's like a wealthy person with ten properties who, when in urgent need of cash, finds that the properties cannot be liquidated within five minutes; this time gap is the 'slaughterhouse' that speculators love.
A deeper crisis stems from 'credit contagion'. USDD plays the role of blood in the TRON ecosystem, with a large amount of lending, staking, and LP trading revolving around it. This deep binding means that once the expectations of USDD decoupling exceed a certain critical point, the entire ecosystem's DeFi Lego will experience a chain collapse. Holders are not only selling USDD but are also withdrawing all positions related to **TRX**. This all-encompassing run on liquidity can instantly break through any algorithmically set defense line.
So, as investors, how should we identify the signs of failure? First, we need to focus on the 'hard asset ratio', which refers to the actual coverage rate of real **BTC** and **ETH** as well as compliant stablecoins against the market capitalization of USDD, excluding native tokens and algorithmic adjustments. If this ratio is below 80% and the overall market volatility is rising, then the so-called 200% collateral ratio is merely a consolation prize. Secondly, observe the daily trading limit of the PSM module; if the redemption demand consistently occupies the upper limit of the quota, it indicates that liquidity is drying up.
The Web3 world of 2025 no longer believes in 'too big to fail'. From the collapse of algorithmic stablecoins to the current hybrid collateral models being tested, the most profound lesson we've learned is that, in the world of blockchain, mathematics never lies, but the human packaging of mathematics can. The excess collateralization of USDD is a bonus in favorable situations, but in the face of a liquidity black hole during adverse conditions, it resembles a revolver without a safety catch.
The future battlefield for stablecoins will belong to those underlying protocols that possess extreme transparency and instant liquidity. For every trader operating USDD, understanding the reflexive logic behind it is far more critical than deciphering that attractive collateralization rate chart. Always be prepared to retreat to a more solid asset fortress before the first domino falls.
This article represents an independent analysis and does not constitute investment advice.
