Justin Sun, founder of the Tron blockchain and Grenada's ambassador to the World Trade Organization, said the collapse of UST and LUNA is a good lesson in what not to do when building an algorithmic stablecoin.
Before the collapse, the total value of Terra's assets was about $40 billion. Founded in 2018, the blockchain didn't really take off until the last year of the recent crypto bull market. A series of apps and an impetuous founder attracted the attention of retail and institutional clients. And that meteoric growth may have been the company's undoing.
"If I were Do Kwon, I would have approached the situation much more cautiously," Sun said Friday on CoinDesk TV's "First Mover," referring to Terra's founder. That may be easier said than done.
Just three days before Terra collapsed, Tron launched its own algorithmic stablecoin, USDD.
It is still unknown what exactly triggered Terra's demise. Some members of the blockchain community have put forth a conspiracy theory that institutions like BlackRock (BLK) and Citadel Securities forced the liquidation by exploiting a known flaw in the network's design. Others believe the blockchain simply couldn't handle the stress as all risk assets withdrew due to an impending economic recession.
Sun, who is not always known for his sober views or rational behavior, was a bit more realistic about this. He said that whatever the trigger, Terra's collapse was preceded by a major capital movement on the network after Terraform Labs began withdrawing UST from a liquidity pool on the decentralized stablecoin exchange Curve.
Terra leadership pulled liquidity from a stablecoin swap called 3pool in anticipation of its own tool to improve UST markets, called 4pool. Whatever happens next, Sun said the timing was perfect for anyone to launch an attack on Terra.
"Nobody [could] defend the price or the peg," he said, referring to the mechanism that artificially pegs the UST to the U.S. dollar.
Sun may be familiar with the technical details of UST's collapse, as some experts have noted 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 grateful for the learning experience of UST's "dramatic" end.
Still, Sun remains concerned that USDD could be targeted by short sellers or suffer a similar fate to UST.
Terra cannot undo the damage it has done, but current and future algorithmic stablecoins must focus on "organic growth." They also need to be demonstrably decentralized and likely live on multiple blockchains, he said.
Tron, which offers extremely low money transfer fees, is home to many users of the centralized stablecoin Tether (USDT). Sun, who has been criticized in the past for his lack of transparency, said he believes Tether, the organization that manages the eponymous stablecoin, maintains full reserves.
"I would encourage Tether to be even more transparent in its communications with the crypto community," he said.
USDD is still in its early stages, but is "very safe," according to Sun. At the very least, its $348 million market cap means that a collapse would not cause cascading problems in the crypto markets, as it did with UST. Sun, who is known for his boasts, said he is seeking a $2 billion valuation for the coin.
"We need to be more careful," he added. Although they have proven risky, he is still an absolute proponent of algorithmic stablecoins, which could be the easiest way to create a proxy dollar value that is truly not dependent on regulation.
"Today, stablecoins are the most centralized paper in this decentralized world," he said, adding that the fate of centralized options will be decided by regulators around the globe.
In a more light-hearted tone, Sun said Terra's developers should turn the now-worthless UST and LUNA tokens into meme coins like "SHIBA or a DOGE coin."
"That's the only way to solve this problem," he said.