Stablecoin Aftershocks From LUNA and UST’s Collapse

Japan has introduced a bill banning algorithmic stablecoins, and Tron's USDD stablecoin has become over collaterallized.

Stablecoin Aftershocks From LUNA and UST’s Collapse
Photo by Omar Ram / Unsplash

When the Terra LUNA ecosystem imploded, destroying billions in value and breeding countless conspiracies about what was happening, everyone seemed to agree on only one thing: things were going to change. Unlike most weekdays, it wasn’t just Elizabeth Warren yelling on national television about regulating cryptocurrencies. After the collapse, it was Korean regulators calling for investigations, and police performing raids on Terraform Labs. The deluge of LUNA-UST copy cats (Justin Sun at Tron, Near Protocol’s USN, etc.) all got real quiet.

Now that some time has passed, we’re starting to see what comes of the fallout. Japan just passed a bill ensuring that all stablecoins can have a 1-to-1 payout. The bill requires stablecoins to be backed by the yen, or other fiat currencies, effectively killing the algorithmic stablecoin. This bill will come into effect next year. The new regulation marks stablecoins as digital money, meaning they can be issued only by licensed banks, registered money transfer agents, and trust companies.

On the other hand, Justin Sun and Tron rolled ahead with plans to launch Tron’s stablecoin, USDD.  USDD was an almost exact copy of LUNA’s UST, and it launched May 5th. Given the recent chaos, Sun’s position on USDD has changed, and the official policy is now to remain over collateralized. This means that USDD will be backed with 130% of the value of the stablecoin, consisting of other cryptocurrencies and stablecoins.

It’s unclear if an over collateralized stablecoin like USDD would pass Japan’s new regulatory framework, but Tron would likely have to get a banking license, or similar regulatory approval, if they were a registered corporation in Japan.

As far as over collateralization goes, holding other cryptocurrencies as a backstop is a bad plan. If you dump hundreds of millions to billions in an individual coin into the market, you’ll crash the price of that crypto and drag down the value of your reserves, as we saw with UST and Bitcoin. DAI has taken to collateralizing with real world assets, which have a more stable price curve and a potentially deeper liquidity pool.

The main takeaway from the recent stablecoin saga is that we don’t have a decentralized, antifragile way of making an algorithmic stablecoin. And given the pace of regulators pushing to eliminate algorithmic stables, we may never get one.