Justin Sun didn't expect Terra's $19 billion UST stablecoin to be crushed less than a week after launching his own algorithmic stablecoin, USDD.
In late April, Sun announced that the blockchain it founded, Tron, would create its own algorithmic stablecoin, USDD. The controversial project has been criticized for its similarity to the Terra stablecoin UST, which until last week was the largest decentralized stablecoin by market cap.
In a Lehman Brothers-like moment for crypto markets, UST lost its peg to the U.S. dollar on Tuesday, triggering a painful death spiral that nearly wiped out Terra's $30 billion ecosystem, including the once red-hot LUNA token. A wave of extreme fear among traders led to steep declines across cryptocurrencies, and the contagion appears to have briefly spread to other stablecoins, including Tether's USDT and the Waves blockchain ecosystem's Neutrino-USD, or USDN.
But Sun is an optimist. "I still believe in algorithmic stablecoins," he told CoinDesk in a Zoom interview conducted before the market turmoil surfaced.
According to his whitepaper, Sun's stablecoin would maintain its peg through a minting/burn process that converts one USDD into $1 worth of TRX, the native token of the Tron blockchain. Conversely, $1 worth of TRX could be burned to mint a USDD.
As of Saturday morning, USDD's market cap was $270 million, according to CoinMarketCap data. That's just a fraction of UST's market cap before last week's collapse, and for now poses no threat to asset-backed stablecoins USDT ($77 billion) and USDC ($51 billion), nor to the current leading stablecoin for decentralized financial transactions, $DAI ($6.4 billion).
Currently, yields for Tron's USDD deployment are as high as 40%, about double the 20% yield offered by Terra's Anchor Protocol.
Despite the dissolution of UST last week, Sun is confident that Tron's $USDD will ultimately prove successful.
The controversial crypto entrepreneur (and Grenada ambassador to the World Trade Organization) spoke with CoinDesk about how USDD will differ from UST, the $10 billion Tron DAO treasury he plans to build, the crypto bear market, and whether he is in any way responsible for triggering the Terra meltdown (as some #cryptotwitterati have claimed).
This interview has been edited for length and clarity.
CoinDesk: How did you come up with the idea to launch this decentralized stablecoin? Many critics are calling it a copy of LUNA/UST.
Justin Sun: First, I want to talk a little bit about algorithmic stablecoins. I think they are very important for our industry. Today's stablecoins are very centralized. They are all collateralized, which means they all require a bank and real banking services. We call crypto a decentralized world, but today stablecoins are the most centralized part. We wanted to develop an algorithm that would ensure that stablecoins could remain fundamentally decentralized.
I think the failure of LUNA was not because algorithmic stablecoins are not viable or not feasible. The failure of LUNA depended mainly on too much leverage. They grew to a dramatic market cap in a very short time.
When we developed USDD, we focused on healthy growth of USDD. We want to keep our USDD market cap relatively small compared to TRX and overall market cap. And at the same time, smaller than the Tron DAO reserve.
CoinDesk: How do you plan to build the $10 billion reserve fund?
Sun: We have acquired BTC, USDT, USDC TUSD and other stablecoins.
CoinDesk: Isn't it somewhat ironic that you have a bunch of centralized stablecoins in the treasury backing this decentralized stablecoin?
Sun: We want two safety nets. The first is the algorithm. The stablecoin is primarily secured by the algorithm itself. It basically runs in a decentralized way. But think about the current market volatility.... So we need a decentralized reserve to try to use the money we have to stabilize the market.
CoinDesk: Do you plan to buy a diversified basket of crypto assets, like the Luna Foundation Guard strategy? If so, which assets are you targeting?
Sun: We haven't finalized the list yet, but I think the top two we're buying right now are BTC and TRX. But we will also consider other stablecoins and tokens in the future.
CoinDesk: What is the planned split of the $10 billion treasure?
Sun: I think half will be in stablecoins. Mainly USDT and USDC, about $2 billion each. We also hold other stablecoins, like BUSD, DAI and TUSD - about a billion dollars in total. The rest is mostly bitcoin and TRX.
CoinDesk: Do you know the split between bitcoin and TRX?
Sun: I think Bitcoin makes up about 80% of it.
CoinDesk: If you look at the USDD chart [on Thursday morning], you definitely see a little more volatility. Do you have any idea what's causing that particular volatility?
Sun: We think 5% is the range of a depeg, so we'll run with volatility until then. Lately, Luna has been causing a panic, not only in algorithm stablecoins, but also in centralized stablecoins. So we've seen the tether price go up and down. Today, I look very closely at market volatility and we have market makers and also liquidity providers to keep the price stable.
CoinDesk: What is your plan in case USDD fails, as it did with UST?
Sun: I think the problem with LUNA is still that they used too much leverage. When the market collapses, the money they have in their reserves is not enough to recover. We've all seen the market panic.
[The Luna Foundation Guard] needs at least $10 billion to save the market and prevent it from collapsing. That's why leverage is dangerous. When we use leverage, we always have to be aware of how much we have in our reserve. But it's not just about how much money you have, it's also about how quickly you can provide liquidity.
That's why our reserve consists of different layers. We have stablecoins that can be used immediately if something bad happens, and then we can buy time, and then we can gradually liquidate other assets as we need them. LUNA grew too fast and didn't have time to build a good reserve fund to stabilize the market.
If you remember, after the attack, people pulled the 3-pools out of Curve and started to build the 4-pool. But in the period in between, the market liquidity was very weak. So when we provide liquidity to the market, we have to be extremely careful even with this kind of liquidity shortage. I still believe in algorithmic stablecoins. If we manage them well, they can certainly be a good decentralized alternative.
CoinDesk: In the context of the UST depeg, there have been rumors about whether or not it was a deliberate, coordinated attack on the peg. Some have even mentioned you as a possible attacker, do you have anything to say about that?
So: I think the LUNA situation was mainly caused by a market panic rather than an organized attack. But we saw a lot of people pulling out liquidity at a very sensitive time. I wish the LUNA team would prepare much more carefully for [liquidity shifts].
If you are going to manage algorithm stablecoin liquidity, I would basically advise you to make changes in a good, healthy market. I think the Federal Reserve had their meeting the day before LUNA shifted their liquidity, right? Those times are super sensitive, you don't want to do anything to mess up liquidity at that time. So I think there's a lot of details that you have to pay attention to when you're doing an algorithmic stablecoin.
CoinDesk: Just to be clear, you don't think this was an organized attack? And you yourself are not behind it?
Sun: [laughs] No, it wasn't me.
CoinDesk: What do you think the Terra team did right, and what do you think they did wrong that you wouldn't do?
Sun: At the end of the day, the Terra team opened up the era of algorithmic stablecoins. It's the first time algorithmic stablecoins have reached a market cap of over $10 billion. They have also managed to bring on board many very reputable institutions and capital to build this product. Terra has inspired many of the innovative DeFi products in the industry.
What they have done wrong is, first, they have achieved a very high market cap in a very short period of time. If the market cap was less than $5 billion, the company would not have failed like this. It's going to be so much easier to pull the peg back in. That's the first thing, I think they basically grew too fast.
The second mistake, which is similar to the first, is that they grew in a very short period of time and didn't have time to consider all the different variables in these very complicated markets. First of all, liquidity - when should you move the liquidity pool, how much money do you need to put into the pool, how do you build the Luna Foundation Guard Funds. There are a lot of things they need to plan in advance, but because they grew in a very short period of time, I don't think it was possible for them to consider everything.
Third, LUNA had a problem when they set the interest rate for the anchor. I think yesterday they had to lower it from 20% to 4%. They should have done that a long time ago. When you reach a certain market capitalization, it is time to lower the interest rate a little bit.
I also think we need to focus on real use cases, not leverage. We need a lot of people using stablecoin in their daily lives, which also takes time.
CoinDesk: With Tron, you advertise a 30% risk-free return, which is even higher than Anchor. I just heard you criticize Anchor's unsustainable return. Why are you setting an even higher return?
Sun: It's basically a marketing strategy, right? You get everyone involved to participate in the growth of Stablecoin. I think the return should be based on the growth of the product.
When people start their businesses, they spend a lot of time advertising and marketing their brand. But after they have an established brand and a very loyal customer base, they will rethink their brand strategy.
If you're an early adopter, you can get more return on investment. I think that's perfectly reasonable. But why keep the same strategy after a year when you are still very small? I think this strategy needs to be dynamic, rather than a fixed return.
CoinDesk: Right, so the 30% can be an introductory offer. When do you plan to reduce it?
Sun: First of all, the return should depend on the time someone puts in the liquidity in the first place. The problem with the anchor is that people can pull money out of the pool immediately, which is also very dangerous. If the market panics, all the people will want their money immediately.
For example, we can offer you a 10% return if you want to withdraw your money at any time. If you want to keep your money fixed for six months, you can get 15%, and if you want to keep your money fixed for one year, you can get 20%. Basically, I think these kinds of return structures should depend on time.
We still need to design a better structure on how to incentivize the community and liquidity providers.
CoinDesk: It sounds like what you just mentioned with these incentive structures is not an algorithmic stablecoin-specific problem. These issues around incentives and tokenomics are issues with crypto projects in general.
Sun: Exactly.
CoinDesk: Right now, there's a lot of hesitation around algorithmic stablecoins. A lot of people think the mechanism is doomed to fail. They say, "We just don't believe in the concept." What would you say to those people?
Sun: I have complete faith in stablecoins. When I first got into the industry, there was the Mount Gox hack, where many people lost their life savings. After that, many people didn't believe in crypto exchanges. I remember people saying at that time, "I don't trust any crypto exchange anymore. I only use Bitcoin in my wallet now, and if I want to sell to someone, I go to localbitcoin.com."
So we have to be very careful and look at this kind of operation like a crypto exchange. It is very difficult. You have to be very careful with customers' money and gain their trust, and it's very easy to fail. In the last 10 years of Bitcoin history, many exchanges have been hacked, and many of them went bankrupt because of the hack. Therefore, we need to do things very carefully.
The crypto industry is going to evolve, and algorithmic stablecoins have to be there, because I think this is a very important component of our ecosystem. We can't blame the algorithm just because LUNA failed, just like we can't blame the crypto exchange. I think we just need more sophisticated and better thought out structures. We need to think about things like leverage and growth, and also have a dedicated team to manage it carefully.
CoinDesk: So you don't think there's a fundamental flaw in the design of these stablecoins, and you think Terra/LUNA failed because of more operational issues?
Sun: Yes. It can be prevented if things are done more carefully. For example, no bank in the world can survive if all its customers come to it on the same day and ask it to pay back their money. Any bank also needs very sophisticated management, doesn't it? So I think this is more about good management. Many banks go bankrupt, but some survive.
Also, we're seeing these financial crises, like 2008. I think these kind of death spirals are very common throughout the financial industry. It's an expensive lesson. But we can't just give up on the financial industry because of these kinds of crises.
CoinDesk: What are your thoughts on whether this will usher in a new crypto winter? What would that mean for the industry in the near term?
Right now it's the lower limit of support because people are panicking too much, especially today. On Binance, there was once a person who wanted to sell four Tethers for one USDC. That's how much people are panicking.
People are even giving up on USDT, which is a stablecoin. When you talk about the sentiment in the market, it's extreme fear. I've seen this already in 2019. In times of market crash, people start tethering FUD.
CoinDesk: What do you think about the price of bitcoin? Will it fall below $20,000?
Sun: If Bitcoin can ever fall below $20,000, I'm all in. That's the first thing. The second thing is that I think right now, at least in the short term, it's the bottom. We can't predict the future, but I think now is definitely a good time to buy.