Terra Classic Hopefuls Mull Revival of Failed UST Stablecoin

Community members are vying for a new model to bolster revenue to sustain a peg to the U.S. dollar.

AccessTimeIconApr 28, 2023 at 1:04 p.m. UTC
Updated May 2, 2023 at 8:08 p.m. UTC

Terra Classic community members are mulling a revival of the network’s failed terraUSD (USTC) token nearly a year after Terra’s implosion.

Terra Classic is the original network created by Terraform Labs. It has continued as an independent blockchain rather than Terra 2.0, which is a forked version that was created in the wake of Terra's collapse.

In discussions that started in mid-April, community members are describing a model that relies on token buybacks, unidirectional swaps, staking and an “algorithmic peg divergence fee” to address the issues with the original design.

Algorithmic stablecoins like USTC are backed by a basket of assets, such as LUNA and bitcoin (BTC), without depending on any centralized third party to hold those assets. Most of the tokens, however, fall victim to a “death spiral” – with outflows or sales of backing assets causing a sudden de-pegging of USTC-like projects.

As described by pseudonymous member “RedlineDrifter,” a divergence fee mechanism would charge a fee equal to the difference in price between the peg and market price of USTC, which could range from 0% at peg to 100% at a 50% deviation from the peg. The fees would be paid by users in demand of USTC tokens.

This design is a disincentive for selling below the peg and an incentive for buying to ensure the accrual of the more desirable asset, i.e. USTC or tokens that back it at that time.

The fees retained by the protocol are used to buy back USTC and maintain the peg, and the protocol is implemented across all USTC trading pairs both on and off-chain.

RedlineDrifter proposed a USTC staking tool to drive capital to the token, resulting in its price appreciation, at least on paper.

“We are in a unique situation with USTC in that it is currently viewed less as a store of value and more a speculative asset," RedlineDrifter wrote in the proposal. "The potential to near 50x with a repeg is one of the few drivers of trading as there’s currently no utility."

“To bring some utility to USTC and take it out of circulating supply in the process, I propose that we create a new savings/staking module for USTC with 1month, 6month and 12month lockup periods with increasing reward rates for longer lockup," the proposal continued. "This module is purely about taking USTC out of circulating supply to accelerate the incremental repeg efforts and put increased positive pressure on USTC price."

Community members say Terra co-founder Do Kwon “had the right idea” that crypto markets required a fully-decentralized token to create a decentralized economy. As of Friday, markets rely heavily on centralized stablecoin lenders such as Tether Global and Circle, which communities like Terra believe is against the ethos of cryptocurrencies.

Kwon is Terra’s disgraced creator who’s wanted by prosecutors in South Korea for his role in the project. Daniel Shin, the other co-founder of Terra, was indicted in South Korean courts earlier this week.

The Terra network imploded last May as sudden outflows from the protocol caused UST to fall to a few pennies within two weeks alongside a 99% drop in terra (LUNA) tokens, as CoinDesk reported.

The project has since been irrevocably written off, but communities continue to churn, hoping to bring the project back to its glory days.

Edited by Stephen Alpher.


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Shaurya Malwa

Shaurya is the Deputy Managing Editor for the Data & Tokens team, focusing on decentralized finance, markets, on-chain data, and governance across all major and minor blockchains.