Terra Classic Hopefuls Mull Revival of Failed UST Stablecoin

Terra Classic community members are mulling a revival of the ecosystem’s failed terraUSD classic (USTC) nearly a year after Terra’s spectacular implosion.

Terra Classic is the original network created by Terraform Labs, which has continued as an independent blockchain rather than Terra 2.0 – a forked version created in the wake of Terra’s collapse.

Discussions on community forums that started in mid-April are describing a model that relies on token buybacks, unidirectional swaps, staking and an “algorithmic peg divergence fee” to address the issues with the original design.

Algorithmic stablecoins like UST are backed by a basket of assets, such as LUNA and bitcoin (BTC), without depending on any centralized third party to hold those assets. However, most of such tokens often fall victim to a “death spiral” – with outflows or sales of backing assets causing a sudden de-pegging of UST-like projects.

As described by member “RedlineDrifter,” a divergence fee mechanism would charge a fee equal to the difference in price between the peg and market price of USTC, which could range from 0% at peg to 100% at a 50% deviation from the peg. These fees would be paid by users in demand of USTC tokens.

This design disincentivizes selling below the peg and incentivizes buying to ensure the accrual of the more desirable asset, i.e. USTC or tokens that back it at that time.

The fees retained by the protocol are used to buy back USTC and maintain the peg, and the protocol is implemented across all USTC trading pairs both on and off-chain.

RedlineDrifter proposed a USTC staking tool to drive capital to the token, resulting in its price appreciation, at least on paper.

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“We are in a unique situation with USTC in that it is currently viewed less as a store of value and more a speculative asset,” wrote RedlineDrifter in the proposal. “The potential to near 50x with a repeg is one of the few drivers of trading as there’s currently no utility.”

“To bring some utility to USTC and take it out of circulating supply in the process, I propose that we create a new savings/staking module for USTC with 1month, 6month and 12month lockup periods with increasing reward rates for longer lockup,” the proposal continued. “This module is purely about taking USTC out of circulating supply to accelerate the incremental repeg efforts and put increased positive pressure on USTC price.”

Community members say Do Kwon “had the right idea” that crypto markets required a fully-decentralized token to create a decentralized economy. As of today, markets heavily rely on centralized stablecoin lenders such as Tether Küresel and Circle, which communities like Terra believe is against the ethos of cryptocurrencies.

Kwon is Terra’s disgraced creator who’s wanted by prosecutors in South Korea for his role in the project. His Terra co-founder Daniel Shin was indicted in South Korean courts earlier this week.

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The Terra ecosystem imploded last May as sudden outflows from the protocol caused UST to fall to a few pennies within two weeks alongside a 99% drop in terra (LUNA) tokens, as CoinDesk then reported.

The project has since been irrevocably written off, but communities continue to churn – hoping to bring the project back to its once-glory days.

Edited by Stephen Alpher.

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