Justin Sun, founder of the Tron blockchain and Grenada’s ambassador to the World Trade Organization, said that, if anything, the collapse of UST and LUNA was a good lesson in what not to do when building an algorithmic stablecoin.
Before it collapsed, the combined value of Terra’s twinned assets was about $40 billion. Founded in 2018, the blockchain only really got going in the last year of the recent crypto bull market. A suite of apps, and a boisterous founder, attracted both retail and institutional attention. And that meteoric growth may have been its undoing.
“If I was Do Kwon I would’ve taken care of the situation in a much more careful way,” Sun said Friday, referring to Terra’s founder, on CoinDesk TV’s “First Mover.” That may be easier said than done.
Just three days before Terra collapsed, Tron launched its own algorithmic stablecoin, USDD.
It’s still unknown what exactly catalyzed Terra’s demise. Some in that blockchain’s community pushed a conspiracy theory that institutions including BlackRock (BLK) and Citadel Securities forced liquidations by exploiting a known flaw in the network’s design. Others think the blockchain just couldn’t handle the stress because all risk assets pulled back because of a looming economic recession.
Sun, not always known for his sober takes or rational behavior, was a little more realistic. He said whatever the impetus, Terra’s collapse was preceded by a major move of capital on the network after Terraform Labs began to withdraw UST from a liquidity pool on decentralized stablecoin exchange Curve.
Terra’s leadership removed liquidity from a stablecoin swap called 3pool in anticipation of its own dedicated tool meant to improve UST markets, called 4pool. Whatever happened next, Sun said the timing was perfect for anyone wanting to launch an attack on Terra.
“Nobody [could] defend the price or the peg,” he said, referring to the mechanism that keeps UST artificially pegged to the U.S. dollar.
Sun may be versed with the technicalities of UST’s collapse, considering some experts have noticed the similarities between Tron’s USDD and Terra’s UST. He said he planned to launch the USDD stablecoin project three months ago, and is thankful for the learning experience of UST’s “dramatic” end.
That said, Sun remains concerned that USDD could be attacked by short sellers or face a similar fate to that of UST.
Terra cannot undo the damage it caused, though current and future algorithmic stablecoins need to focus on “organic growth.” They must also be provably decentralized, and likely need to live on multiple blockchains, he said.
Tron, which offers ultra-low fees to move money, is home to many users of the centralized stablecoin tether (USDT). Criticized in the past for its lack of transparency, Sun said that he believes Tether, the organization that manages the eponymous stablecoin, maintains complete reserves.
“I would like to encourage Tether to have an even more transparent way to communicate with the crypto community,” he said.
Still in its early stages, Sun said USDD “is very safe.” At the very least, its $348 million market capitalization means if it collapsed it wouldn’t cause cascading problems across the crypto markets as UST did. Sun, characteristically braggadocious, said he’s eyeing a $2 billion valuation for the coin.
“We need to be more careful,” he added. Although they’ve been proven risky, he’s still a complete supporter of algorithmic stablecoins, which might be the easiest way to create a proxy dollar asset that is truly untethered from regulation.
“These days, stablecoins are the most centralized part of this decentralized world,” he said, adding the centralized options’ “fate is decided by the regulators around the globe.”
Taking a more lighthearted line, Sun said Terra’s developers should turn the now-valueless UST and LUNA tokens into meme coins like “SHIBA or a DOGE coin.”
“It’s the only way to solve this problem,” he said.
See also: UST Won't Be the End of Algorithmic Stablecoins | Opinion
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.