Can Terra Classics USTC Stablecoin Ever Get $1 Back?

USTC shot up 57% shortly after a Terra developer published a proposal asking the community to work on bringing the former stablecoin back to its $1 peg – and keep it there.

Back from the dead?

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

Terra developer Tobias Andersen published a Medium post yesterday saying that the Terra Classic community (or “Lunatics” as they style themselves) should aim to push the ecosystem’s original stablecoin, TerraClassicUSD (USTC), back to its $1 peg.

The post was made by USTC wound slightly more than 57% on Binance (the exchange with the most liquidity for the token), from $0.029 to $0.045. The token then continued to fall 12% and is trading at $0.039 at the time of writing. Per CoinGecko data, the USTC is up 592% since it hit a low of $0.006 on June 18.

The algorithmic stablecoin, formerly known as UST, used to be Terra’s flagship. An algorithm allowed users to create 1 UST by burning $1 worth of LUNA (Terra’s native governance token and balancing mechanism for UST) and vice versa. The mechanism helped make both LUNA and UST two of crypto’s biggest tokens by market capitalization during the 2021 bull run. However, it also created a negative feedback loop when the stablecoin broke the link in early May, and investors lost confidence in it. UST, LUNA and the rest of the Terra ecosystem collapseddirectly wiped out more than $40 billion of value from the crypto market in a matter of days.

Practical concerns

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

Andersen argues that a USTC repeg can be achieved by encouraging new businesses to use Terra Classic’s existing blockchain infrastructure. To that end, Andersen proposes implementing a burn mechanism for USTC, lock-up periods for LUNC stakes, and creating partial swap and partitioned pool mechanisms (which can then be taxed). But the Terra developer fails to explain exactly how even a successful implementation of these features would be helpful in any way for the USTC to regain connectivity.

It is for now three main types of stablecoins. Some, such as USDT and USDC, are backed by reserves made from government-issued currencies, such as US dollars or euros. Others, like MakerDAO’s DAI, use an over-security process: users can deposit ETH or other cryptocurrencies and deposit DAI against their assets. Finally, algorithmic stablecoins, like the old UST, are usually backed by algorithmic mechanisms that try to steer market forces towards stabilizing the coin’s price.

But the $1 goal is probably out of reach as well. The proposal appears to conflate the idea of ​​network activity on the Terra Classic blockchain with a price increase for the USTC. Unfortunately, that will not 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 the USTC to capture some of the value brought to the Terra blockchain, there are no fundamental reasons for the former stablecoin’s price change .

Nor does it address how USTC will consistently maintain its bond without becoming a purely speculative asset.

It’s not the first time Lunatics have pinned their hopes on dubious plans. Society recently gathered around the idea that the LUNC token, which trades at $0.00029 today, could also reach $1. The token has to surpass Bitcoin’s own market value several times for that to happen.

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