Justin Sun shares his thoughts about UST/LUNA, algorithmic stablecoins, and how it relates to USDD. A very interesting read.
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Justin Sun didn't anticipate Terra’s $19 billion UST stablecoin would unravel less than one week after his own algorithmic stablecoin, USDD, launched.
In late April, Sun announced the blockchain he founded, Tron, would be creating its own algorithmic stablecoin, USDD. The controversial project drew criticism for its likeness to the Terra stablecoin UST, which, until this past week, was the largest decentralized stablecoin by market capitalization.
In a Lehman Brothers-like moment for crypto markets, UST lost its peg to the U.S. dollar on Tuesday, catalyzing a painful death spiral that all but wiped out the $30 billion Terra ecosystem, including its once-white-hot LUNA token. A wave of extreme fear among traders led to steep declines across all cryptocurrencies, and the contagion appears to have briefly spread to other stablecoins, including Tether’s USDT and the Waves blockchain ecosystem's neutrino USD, or USDN.
But Sun is an optimist. “I still believe in algorithmic stablecoins,” he told CoinDesk in a Zoom interview, which was scheduled before any of the market turmoil surfaced.
According to its white paper, Sun’s stablecoin would maintain its peg by a minting/burn process that would convert one USDD to $1 worth of TRX, the native token of the Tron blockchain. Conversely, $1 worth of TRX could be burned to mint one USDD.
As of Saturday morning, the market cap of USDD reached $270 million, according to data from CoinMarketCap. That's a fraction of the market cap of UST prior to last week's collapse and for now represents little threat to the asset-backed stablecoins USDT ($77 billion) and USDC ($51 billion), nor to the now-leading decentralized-finance stablecoin, DAI ($6.4 billion).
Currently, the yields for staking Tron’s USDD are as high as 40%, about double the 20% yield offered by Terra’s Anchor Protocol.
Despite UST’s unraveling this past week, Sun is confident Tron’s USDD will ultimately prove successful.
The controversial crypto entrepreneur (and ambassador of Grenada to the World Trade Organization) spoke with CoinDesk about how USDD will differ from UST, the $10 billion Tron decentralized autonomous organization (DAO) treasury he’s planning to build, the crypto bear market and whether he’s in any way responsible for triggering the Terra meltdown (as some #cryptotwitterati have suggested).
This interview has been edited for length and clarity.
How did you get the idea to launch this decentralized stablecoin? Many critics are calling it a copy of LUNA/UST.
First, I want to talk a little bit about algorithmic stablecoins. I think they are very important to our industry. Today’s stablecoins are very centralized. It’s all collateralized, which means they all need a bank, and real bank services. We call crypto a decentralized world, but today, stablecoins are the most centralized part. We wanted to design an algorithm to make sure stablecoins can basically stay decentralized.
I think the failure of LUNA was not because algorithmic stablecoins are not viable or are not doable. LUNA’s failure mainly depended on too much leverage. They grew to a dramatic market cap in a very short period of time.
When we designed USDD, we focused on the healthy growth of USDD. We want to keep our USDD market cap relatively small compared to TRX and total market cap. And also at the same time, smaller than the Tron DAO Reserve.
How do you plan on building up the $10 billion reserve fund?
We acquired BTC, USDT, USDC, TUSD and other stablecoins.
Is it kind of ironic that you have a bunch of centralized stablecoins in the treasury collateralizing this decentralized stablecoin?
We want two safety nets. The first is the algorithm. The stablecoin is primarily backed by the algorithm itself. It basically runs in a decentralized way. But you know, consider the current market volatility right now. ... That's why we need a decentralized reserve to try to use the money we have to stabilize the market.
Do you plan on buying a diversified basket of crypto assets like the Luna Foundation Guard's strategy? If so, what assets are you eyeing?
We haven't finalized the list but I think the main two we are buying right now are BTC and TRX. But we will consider other stablecoins and tokens in the future.
What’s the planned breakdown of the $10 billion treasury?
I think half will be in stablecoins. Mainly USDT and USDC, around $2 billion each. We also hold other stablecoins, like BUSD, DAI and TUSD – altogether around one $1 billion. The rest mainly is bitcoin [BTC] plus TRX.We have increased $260 million supply of #USDC on #TRON. Now total #USDC supply on #TRON is $1.241 billion. — TRON DAO Reserve (@trondaoreserve) May 14, 2022
Do you know the breakdown between bitcoin and TRX?
I think bitcoin occupies like 80% of that.
Looking at the USDD chart [Thursday morning], you definitely see some more volatility. Do you have any thoughts on what caused that particular volatility?
We consider 5% to be the range of a depeg, so until then we will run with the volatility. Recently, luna has caused a panic now not only on the algorithm stablecoin, but also in centralized stablecoins. So we have seen the tether price go up and down. Today I'm looking very closely at the market volatility and we have market makers and also liquidity providers to keep the price stable.
What's your plan in case USDD depegs, like what happened with UST?
I think the LUNA problem is still that they used too much leverage. That’s why when the market collapses, the money they have in their reserve is just not enough to recover. We all witnessed the market panic.
[The Luna Foundation Guard] needs at least $10 billion to rescue the market and prevent the depeg from happening. That’s why leverage is dangerous. When we use leverage, we need to always be aware of how much is in our reserve. But it’s not only how much money you have, it’s also about how quickly you can provide the liquidity.
So that’s why our reserve has different layers. We have stablecoins, which can be deployed immediately if anything bad happens, and then it can win time, and then we can gradually liquidate other assets if we need to. LUNA grew too fast, and they didn’t have time to build a good reserve fund to stabilize the market.
If you remember, when the attack happened, people withdrew the 3pools from Curve, and they started to build up the 4pool. But between these times, the market liquidity was very weak. That's why when we provide liquidity to the market, we need to be super careful about this kind of liquidity squeeze as well. I still believe in algorithmic stablecoins. If we handle it well, it certainly can provide a good decentralized alternative.
On the UST depeg, there have been rumors circulating about whether or not it was an intentional, coordinated attack on the peg. Some even mentioned you as one potential attacker, do you have any comment on that?
I think the LUNA situation was mainly caused by market panic rather than by an organized attack. But we did see a lot of people withdraw liquidity at a very sensitive time. I wish the LUNA team would prepare for [liquidity shifts] way more carefully.
If you want to manage algorithm stablecoin liquidity, I will basically advise you to make changes in a good, healthy market. I think the [U.S.] Federal Reserve had [its] meeting one day before LUNA moved their liquidity, right? Those times are super sensitive, you don't want to do anything to mess up the liquidity at that time. So I think there's lots of details, you need to pay attention if you are doing an algorithmic stablecoin.
Just to clarify, you don't think that this was an organized attack? And you yourself are not behind it?
[laughs] No, it was not me.
What do you think the Terra team did right, and what do you think they did badly, that you would not do?
At the end of the day, the Terra team opened the algorithm stablecoin era. This is the first time algorithmic stablecoins have grown past $10 billion in market cap. Also, they managed to get lots of very prestigious institutions and capital on board to build this product. Terra inspired a lot of the innovative [decentralized finance] products in the industry.
In terms of what they did wrong, first, they grew to a very large market cap in a super short period of time. If the market cap were less than $5 billion they wouldn’t have failed like this. It will be so much easier to recover the peg. That’s the first thing, I think they basically grew too quickly.
The second mistake, similar to the first, is because they grew in a very short period of time they had no time to consider all the different variables in these very complicated markets. First of all, the liquidity – like when you should move the liquidity pool, how much money you need to put in the pool, how to build the Luna Foundation Guard funds. There’s lots they need to plan beforehand, but because they grew in a very short period of time, I don’t think it was possible for them to consider everything.
The third thing, LUNA had a problem when they set the interest rate of Anchor [the decentralized money market protocol built on the Terra blockchain]. I think yesterday they had to cut it from 20% to 4%. They should have done that a long time ago. Once you grow to a certain market cap, it is time to cut the interest rate a little.
I also think we need to focus on real use cases rather than leverage. We need lots of people to use the stablecoin in their daily life, which also takes time.
With Tron, you are advertising a 30% risk-free yield, which is even higher than Anchor’s. I just heard you criticize Anchor’s unsustainable yield. Why are you setting an even higher yield?
It’s basically a marketing strategy, right? You get everybody involved to participate in the growth of the stablecoin. I think the yield should depend on the growth of the product.
When people first start their companies they spend a lot of time on promoting, marketing their brand. But after they have an established brand and a very loyal customer group, they will start to reconsider their branding strategy.
If you get involved as an early bird you can get more returns. I think this is totally reasonable. But after a year why keep the same strategy you’re doing when you are very small? I think this strategy needs to be dynamic rather than be a fixed yield.
Right, so the 30% can be an intro offer. When do you plan on cutting it?
First of all, the return should depend on the time someone contributes the liquidity in the first place. The problem with Anchor is people can pull money out of the pool immediately, which is also very dangerous. When market panic is happening, all the people are going to want their money at once.
For example, we can have a 10% yield for you if you want to pull money out anytime. If you can lock up for six months, you can get 15%, and if you want to lock money away for a year, you can get 20%. Basically, I think these kinds of yield structures should depend on time.
We still need to design a better structure on how to incentivize the community and how to incentivize the liquidity provider.
It sounds like what you just mentioned with these incentive structures is not an algorithmic stablecoin-specific problem. These issues surrounding incentivizes and tokenomics are problems with crypto projects in general.
Right now, there is a lot of hesitation around algorithmic stablecoins. A lot of people think that the mechanism is doomed to fail. They say, ‘We just don't believe in the concept.’ What would you say to those people?
I fully have confidence in stablecoins. When I first got to the industry, we had the Mt Gox hack, and a lot of people lost their life savings. Then lots of people didn’t believe in crypto exchanges anymore. At that time, I remember people saying, “I don’t trust any crypto exchange anymore. I will only use bitcoin in my wallet, and if I want to sell to anyone, I will go to localbitcoin.com.”
That’s why we need to be super cautious and view this kind of operation like a crypto exchange. It’s very hard. You need to be super cautious with client money and win client trust, and it’s very easy to fail. In the past 10 years of bitcoin’s history, numerous exchanges got hacked, and loads of them went bankrupt because of the hack. That’s why we need to do things super carefully.
The crypto industry is going to evolve and algorithmic stablecoins have got to be there, because I think this is a very important component of our ecosystem in the first place. We can’t blame the algorithm just because LUNA failed, just like we can’t blame the crypto exchange. I think we just need more sophisticated and well-planned structures. Thinking about things like leverage, growth and also having a dedicated team to carefully manage it.
So you don't think that there’s a fundamental flaw in the design of these stablecoins and you think Terra/LUNA failed due to more operational issues?
Yes. It can be prevented if you do things in a more careful way. For example, no bank in the world can survive if all their customers come to them on the same day and ask them to pay their money back. Every bank also needs very sophisticated management, right? That’s why I think this is more about managing well. We see lots of banks go bankrupt but some survive.
Also, we see these financial crises that happen, like in 2008. I think these kinds of death spirals are very common in the whole financial industry. It’s an expensive lesson. But we can’t just abandon the financial industry because of these kinds of crises.
What are your thoughts on if this will start a new crypto winter? What would it mean for the industry in the near term?
Right now, it's the lower-bound support because people are over-panicking, especially today. At one moment on Binance, there was a person that wanted to sell four Tether for one USDC. That’s how much people are panicking.
People are even giving up on USDT, which is a stablecoin. If you're talking about the mood of the market right now, it’s extreme fear. I saw this back in 2019. In market crash times, people start the tether FUD.
Do you have any thoughts on the price of bitcoin? Will it go under $20K?
If bitcoin can ever go down to $20K, I’m all in. That's the first thing. The second is, I think right now, at least in the near term, it's the bottom. We can't predict the future but I think definitely right now is a good time to buy.