The collapse of the Terra USD (UST) has shed light on the failures of algorithmic stablecoins. However, despite the collapse of UST, Tron co-founder Justin Sun said he still believes in the idea of algorithmic stablecoins.
Sun is the founder of the Tron blockchain and he is Grenada’s ambassador to the World Trade Organization. According to the exec, the collapse of LUNA and UST could be seen as a positive and used as a lesson on what to avoid when building algorithmic stablecoins.
Justin Sun believes in algorithmic stablecoins
Terra was one of the largest ecosystems in the cryptocurrency industry and its combined value was $40 billion. The Terra Network was created in 2018, and it was one of the most promising projects of the past year. Blockchain has been embraced by retail and institutional investors, and the iconic growth has manifested in the total value locked (TVL) of the network.
However, the growth of the UIST stablecoin has been listed as one of the main reasons for the failure of the project. During an interview with CoinDesk, Sun said that “if I was Do Kwon, I would have taken care of the situation much more carefully.”
UIST was not the only algorithmic stablecoin in the industry. Three days before the UST unpeg, the Tron network released its algorithmic stablecoin called USDD. Some members of the crypto community had said that the dynamics of the USDD stablecoin mimicked that of Terra UST.
There are no specific reports or evidence indicating why the UST stablecoin crashed. However, there have been conspiracy theories, the most popular being that BlackRock and Citadel titles exploited a flaw in the design of the stablecoin and forced mass liquidations. Others said the stablecoin collapsed as it could not withstand the stress caused by the recession in the crypto market.
Sun is popular for having radical views on the crypto space. He noted that just before the UST stablecoin began its descent, there was a massive outflow of capital from the UST liquidity pool via the Curve protocol.
The attack happened in the middle of a critical upgrade process within the Terra network. Terra’s management team was removing liquidity from the 3pool stablecoin swap to its dedicated 4pool to improve UST momentum. However, the transition represented the perfect opportunity for anyone who wanted to launch an attack on the protocol.
Similarities Between Tron’s UST and USDD
Experts have pointed out the similarities between the UST stablecoin and Tron’s USDD. Sun said the idea of creating the USDD stablecoin was born three months ago, and he thanked the Terra network for the lesson learned following the collapse of the UST.
However, despite his optimism, algorithmic stablecoins are less reliable than stablecoins fully backed by other assets. Sun also expressed concerns about the future of USDD, saying it was still vulnerable to attacks from short sellers and could suffer the same fate as UST.
The Terra network cannot recover the damage done to UST, as every attempt to repeg the stablecoin has been in vain. Therefore, the algorithmic stablecoins that will be created in the future can learn from the collapse and focus more on the organic growth of the project. These stablecoins must also focus on decentralization to be successful.
The Tron network offers low fees and is the largest network for the stablecoin Tether (USDT). Like Terra’s UST, USDT has also been criticized for being too centralized. However, Sun said he was optimistic that Tether was fully supported.
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