Justin Sun reflects on the UST-Luna fiasco and where it failed

The Tron Blockchain founder Justin Sun recently wrote a blog post on lessons learned from Terra’s (UST) collapse. He opines that over-collateralization is vital for protecting and maintaining the stablecoin peg and a high yield marketed as an incentive is not a sustainable long-term strategy. 

Shortly before Terra’s collapse, which wiped out most of the US$ 50 billion investments poured into the project, its sister token Luna, earned an imitator - Tron’s USDD stablecoin. In the past month, USDD has generated US$ 5.94 billion in total value locked (TVL), securing its place as the third largest Blockchain in the DeFi (decentralized finance) market.

Tron’s design is similar to Terra’s, its  native token TRX are created to act as a stabilization mechanism for its stablecoin USDD to keep the market price of the latter equal. 

‘When USDD’s price < 1USD, users and arbitrageurs could swap 1USDD to 1USD worth of TRX in the protocol,’ according to the USDD white paper. ‘When USDD’s price > 1USD, users and arbitrageurs could swap 1 USD worth of TRX to 1 USDD in the protocol.’

In the blogpost, Sun wrote that he launched USDD after witnessing the exponential growth of UST after learning from its mistakes. Sun noted that Terra’s stabilization mechanism is risky as it is largely backed by the ‘highly-volatile’ Luna while less than 15% of the asset is collateralized by Bitcoin. 

‘The reserve consisted of just $3b of BTC at its peak, hardly enough to collateralize the nearly 19b+ UST supply. During the bank-run over the last two weeks, LFG’s collateral barely made a dent in the overwhelming UST sell pressure.’ 

‘Crypto needs a decentralised stablecoin that regulators can’t interfere with,’ Sun stated in an interview with The Block  four days before UST lost its dollar peg.

The Tron DAO reserves holds a mix of ‘high-quality’ and ‘low-volatile’ assets including USDT, USDC, BTC and TRON to back USDD with a collateralization rate currently at the 180 - 200% range. Tron will gradually increase the USDD supply and plans to ‘ensure USDD is always over-collateralized by a basket of fiat-collateralized stablecoins (e.g., USDT and USDC) as well as Bitcoin and TRON, among other assets. We have already devoted over $550m of assets to the reserve, and plan to continue this as the USDD supply grows.’ The DAO noted that it will reveal all collateral on the TRON DAO Reserve Website soon in a transparent format.

Sun also noted that UST’s 20% fixed yield is unsustainable. Hence Tron builds on Anchor, a 20% fixed-yield lending protocol that has attracted over US$ 14 billion in UST deposits, which is why Tron grew so fast over the past month as users looked to profit from Anchor’s yield while Terra collapsed.

Tron will also separate the staking process into two parts, phase one will allow 2 billion mintable USDD supply, in which users could earn 30% APY for staking USDD. In phase two, there will be no imposed supply cap, lenders and stakers who locked up USDD on decentralized exchanges for a year can continue receiving a higher yield compared to users who staked their tokens for a shorter time period. 

Speaking on Tron’s roadmap of the newly launched USDD, Sun said the DAO’s will focus on ‘stablecoin liquidity and adoption’ to ensure USDD trading pairs are available on decentralized exchanges and forging connections with centralized exchanges. Sun concluded by noting that the industry is moving closer to a cross-chain future and that USDD will expand to support multiple chains apart from its activity from TRON, BNB Chain and Ethereum in the near future. 

Photo: Justin Sun