• Justin Sun’s Opinion on the UST-LUNA Scandal

  • The Tron founder admitted that UST’s early success inspired him to create USDD, a stablecoin that uses a similar algorithmic mechanism.

    Tron founder Justin Sun recently wrote a blog post about the lesson he learned from Terra’s infamous collapse. Over-collateralization, he claims, is essential for keeping the stablecoin peg, and a high yield marketed as an incentive isn’t sustainable in the long run.

    Transparent Over-Collateralization Is Important

    According to the Tron Network’s latest blog post, Justin Sun, the founder of the Tron Network, decided to launch the USDD stablecoin after witnessing the exponential growth of Terra’s UST. Sun’s USDD uses the same algorithmic mechanism as UST, allowing users to burn $1 of TRX in exchange for the right to mint one USDD.

    However, the founder thought such an approach was risky because 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 avoid repeating this mistake, the TRON DAO Reserve has held a mix of “high-quality” and “low-volatile” assets, including USDT, USDC, BTC, and TRON, to back USDD, with the collateralization rate set at 180-200 percent.

    TRON DAO Reserve will disclose the type and amount of collateralized assets to demonstrate its high level of transparency. The Reserve currently holds approximately $295 million in USDT, $82 million in BTC, and $181 million in TRX. The founder specifically mentioned that its network has “the largest supply of fiat-backed stablecoins (USDT) issued on-chain,” which is a critical strength when compared to Terra’s ecosystem.

    A yield of 20% is not sustainable.

    Sun criticized UST’s 20 percent fixed yield as unsustainable in terms of achieving long-term and stable growth for the USDD ecosystem. Tron will instead divide the staking process into two phases, with the first containing a maximum of 2 billion USDD mintable. Users could earn 30% APY for staking the algorithmic stablecoin during this phase.

    There will be no imposed supply cap in phase two. According to the post, lenders and stakeholders who have locked up USDD on decentralized exchanges for a year will continue to receive a high yield, whereas those who have only locked up their assets for a shorter timeframe will receive a lower yield. Sun, however, did not provide a specific figure for the “high yield” in the post.

    Furthermore, the Reserve intends to hold a total of 2 billion in assets as collateral by the end of phase one, with the amount eventually increasing to 10 billion.

    Sun stated that the Reserve will focus on liquidity for the time being, ensuring 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 USDT and USDC’s dominance.

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