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Justin Sun Talks USDD Stablecoin in Wake of LUNA/UST Unravel

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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 that 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 $30bn Terra ecosystem, including its once-white-hot LUNA tokens. 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 whitepaper, 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 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.

CoinDesk: How did you get the idea to launch this decentralized stablecoin? Many critics are calling it a copy of LUNA/UST.

Justin Sun: 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.

CoinDesk: How do you plan on building up the $10 billion reserve fund?

Sun: We acquired BTC, USDT, USDC TUSD and other stablecoins.

CoinDesk: Is it kind of ironic that you have a bunch of centralized stablecoins in the treasury collateralizing this decentralized stablecoin?

Sun: 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.

CoinDesk: 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?

Sun: 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.

CoinDesk: What’s the planned breakdown of the $10 billion treasury?

Sun: 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 plus TRX.

CoinDesk: Do you know the breakdown between bitcoin and TRX?

Sun: I think bitcoin occupies like 80% of that.

CoinDesk: Looking at the USDD chart [Thursday morning], you definitely see some more volatility. Do you have any thoughts on what caused that particular volatility?

Sun: 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.

CoinDesk: What’s your plan in case USDD depegs, like what happened with UST?

Sun: 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.

CoinDesk: 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?

Sun: 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 Federal Reserve had their 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.

CoinDesk: Just to clarify, you don’t think that this was an organized attack? And you yourself are not behind it?

Sun: [laughs] No, it was not me.

CoinDesk: What do you think the Terra team did right, and what do you think they did badly, that you would not do?

Sun: 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 DeFi 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. I think yesterday…

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