Crypto

Can Terra Classic Stablecoin USTC Ever Recover $1?

Key points to remember

  • Terra developer Tobias Andersen submitted a proposal to the Terra Classic community yesterday to work on the $1 USTC repegging.
  • Andersen claims that repeg could be accomplished by attracting new companies to the Terra Classic blockchain.
  • There are several reasons to doubt the viability of the plan, not the least of which is the lack of a real price stabilization mechanism.

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USTC jumped 57% shortly after a Terra developer posted a proposal calling on the community to work to bring the former stablecoin back to and hold its $1 peg.

Back from the dead?

The Terra Classic community hopes its failing stablecoin will make a comeback.

Terra Developer Tobias Andersen published a medium post yesterday arguing that the Terra Classic (or “Lunatics” as they call themselves) community should aim to bring the ecosystem’s original stablecoin, TerraClassicUSD (USTC), back to its $1 peg.

The post caused the USTC to ascend just over 57% on Binance (the exchange with the most liquidity for the token), from $0.029 to $0.045. The token then fell 12% and is trading at $0.039 at the time of writing. According to data from CoinGecko, USTC is at the top 592% since hitting a low of $0.006 on June 18.

The algorithmic stablecoin, formerly known as UST, was Terra’s flagship product. An algorithm allowed users to mint 1 UST by burning $1 worth of LUNA (Terra’s native governance token and balancing mechanism for UST) and vice versa. The mechanism helped turn LUNA and UST into two of the biggest crypto tokens by market capitalization during the 2021 bull run. However, it also created a negative feedback loop when the stablecoin broke its peg in early May and investors have lost faith in him. UST, LUNA and the rest of the Terra ecosystem collapseddirectly wiping out over $40 billion worth of the crypto market in a matter of days.

Practical concerns

While Andersen’s goal is ambitious, the content of his proposal is worn.

Andersen claims that a USTC repeg could be achieved by incentivizing new companies to use Terra Classic’s existing blockchain infrastructure. To that end, Andersen suggests implementing a burning mechanism for USTC, blocking periods for LUNC staking, and creating partial swap and partitioned pool mechanisms (which could then be taxed). But the Terra developer doesn’t explain exactly how even a successful implementation of these features would help in any way to get the USTC back on its feet.

There is currently three main types of stablecoins. Some, like USDT and USDC, are backed by reserves made up of government-issued currencies like the US dollar or Euro. Others, like MakerDAO’s DAI, use an over-collateralization process: users can deposit ETH or other cryptocurrencies and redeem the DAI for their assets. Finally, algorithmic stablecoins, such as the former UST, are usually backed by algorithmic mechanisms that attempt to direct market forces towards stabilizing the price of the coin.

But that $1 goal is probably also out of reach. The proposal appears to confuse the idea of ​​network activity on the Terra Classic blockchain with USTC price appreciation. Unfortunately, that won’t be enough. At most, network activity can increase the price of the ecosystem’s native token, LUNC, but unless a mechanism is put in place for USTC to capture some of the value brought to the blockchain Terra, there is no fundamental reason for the price of the former stablecoin currency.

Nor does it address how the USTC would consistently maintain its peg without becoming a purely speculative asset.

This isn’t the first time the Lunatics have pinned their hopes on questionable plans. The community recently rallied around the idea that the LUNC token, which is trading today at $0.00029, could also reach $1. The token would have to exceed Bitcoin’s market capitalization several times for this to happen.

Disclaimer: At the time of writing this article, the author of this article owned BTC, ETH, and several other cryptocurrencies.

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