Tron (TRX -1.15%) is a $6.35 billion cryptocurrency launched by Justin Sun in 2017, predating many other popular cryptos. And while it does not have the buzz of the likes of Terra or Solana, that doesn't mean it isn't innovating and bringing new development to its ecosystem. Tron made a major announcement last week that a new stablecoin, USDD (which stands for U.S. Decentralized Dollar), will launch on the Tron network on May 5.

The news drew significant investor interest and Tron rose 7% following the news at a time when many other cryptos are in the red.  The launch should attract more users to the Tron network, which will be beneficial for Tron investors. 

Several circular icons connected by a digital network.

Image source: Getty Images.

What is Tron? 

Tron is a delegated proof-of-stake blockchain that hit an all-time high of $0.29 in January 2018. It has a $6 billion market cap and 88 million user accounts, with 21 million active users within the past month. The Tron network has processed 3.1 billion transactions since its inception. While Tron was founded by Justin Sun, it is now run by the Tron DAO (decentralized autonomous organization), a decentralized community of users and investors that oversees the Tron network. 

What is USDD? 

The Tron stablecoin will be algorithmically backed in a similar manner to Terra's TerraUSD (CRYPTO: UST) stablecoin. Fiat-backed stablecoins such as USD Coin (CRYPTO: USDC) are backed by an equivalent dollar amount in the bank. On the other hand, algorithmically backed stablecoins are not backed by physical dollars but instead utilize algorithms to balance supply and demand by incentivizing traders to keep the coin's price stable. Here's how it works: If USDD falls below its peg to $1, traders can exchange 1 USDD token for $1 worth of Tron. If USDD rises above $1, traders can exchange $1 worth of Tron for one USDD. In theory, accruing these small but guaranteed returns should mean high-frequency traders and arbitrage traders should be able to maintain USDD's price within a narrow band around $1.

What does this mean for crypto investors? 

The popularity of Terra's TerraUSD has been a game changer for the Terra network and the price of Luna. Terra pays 19.5% annual percentage yield (APY) interest on TerraUSD held in its Anchor Protocol, which has played a significant part in attracting users to the network. Tron is upping the ante and offering 30% interest on USDD, which will reportedly launch on May 5th. It's doubtful that USDD will supplant TerraUSD or that Tron is even trying to so (in fact, Terra founder Do Kwon has even voiced support for Tron's move), but it is likely that this will attract more crypto investors into the Tron ecosystem. Crypto investors go where the interest rates are and a 30% yield per annum is compelling. How long this interest will be paid at this level is certainly a question to ask, but at least in the short term this should be a major catalyst for the entire Tron ecosystem.

Sun says USDD will be backed by $10 billion worth of other cryptocurrencies to bolster confidence in its stability, although it is not clear at this time which cryptocurrencies this collateral will be. This is reminiscent of Terra's Luna Foundation Guard working to amass $10 billion of Bitcoin in order to provide collateral for TerraUSD. 

Tron is not the only crypto network that is in the process of launching an algorithmic stablecoin. Near Protocol (CRYPTO: NEAR) is reportedly preparing to launch its own USN stablecoin in the coming weeks. 

Looking ahead  

Tron is not a new crypto and it has not approached its all-time high set in 2018 even in the midst of a historic crypto bull market, so I am not expecting anything dramatic here. But it is a healthy ecosystem with a substantial user base and plenty of engagement. The launch of USDD and its 30% yield should catalyze significant interest among crypto investors going forward. Increased usage of USDD will create more demand for Tron. Tron stands to gain on this news and both Tron and USDD are probably worthy of a small allocation in crypto portfolios.