Justin Sun’s Take on the UST-LUNA Fiasco

By | June 1, 2022



Tron founder Justin Sun recently penned a blog post reflecting upon the lesson he learned from Terra’s notorious collapse. According to him, over-collateralization is essential for maintaining the stablecoin peg, and a high yield marketed as an incentive isn’t sustainable in the long run.

Transparent Over-Collateralization Matters

The founder of the Tron Network – Justin Sun – decided to launch the USDD stablecoin after he had witnessed the exponential growth of Terra’s UST, according to the founder’s latest blog post. Sun’s USDD follows a similar algorithmic mechanism as UST did, allowing users to burn $1 of TRX in exchange for the right to mint 1 USDD.

Yet, the founder considered such an approach risky as UST was largely backed by its sister token LUNA, with less than 15% of the asset collateralized by BTC.

“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. “

To learn from this mistake, the TRON DAO Reserve has held a combination of “high-quality” and “low-volatile” assets, including USDT, USDC,  BTC, and TRON to back USDD, with the collateralization rate being maintained at the 180-200% range.

To demonstrate its high transparency, TRON DAO Reserve will release the details regarding the type and amount of collateralized assets. Currently, the Reserve holds approximately $295m in USDT, $82m in BTC, and $181m in TRX. In particular, the founder noted that its network has “the largest supply of fiat-backed stablecoins (USDT) issued on-chain,” which plays into a critical strength compared to Terra’s ecosystem.

20% APY Isn’t Sustainable

Speaking of achieving long-term and stable growth for the USDD ecosystem, Sun commented on UST’s 20% fixed yield, saying it was unsustainable. Instead, Tron will separate the staking process into two parts, with phase one containing a maximum of 2 billion USDD mintable. During this phase, users could earn 30% APY for staking the algorithmic stablecoin.

In phase two, there won’t be any imposed supply cap. The post stated that lenders and stakers who have locked up USDD on decentralized exchanges for 1-year will continue to receive a high yield, while those who only locked up their assets for a shorter timeframe will receive a lower rate. Yet, Sun did not provide a specific number for the “high yield” in the post.

In addition, the Reserve aims to hold a total of 2 billion worth of assets as collateral by the end of phase one and escalate the amount up to 10 billion in the long run.

In terms of the roadmap ahead of the newly launched stablecoin, Sun said the Reserve will focus on liquidity, for now, making sure that more USDD trading pairs are available on decentralized exchanges while deepening partnerships with centralized exchanges. In the long run, the stablecoin will support multiple chains and challenge the dominance of USDT and USDC.

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