UST on Solana: A Mission to Become the Cross-chain Decentralized Stablecoin

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There has been a lot of discussion and interest on Agora, Terra’s governance forum, following the adoption of Governance Proposal #110. In brief, the proposal aimed to introduce Terra stablecoins to the Solana ecosystem. Figment was pleased to support this proposal, and we’re looking forward to seeing more liquidity and adoption across both networks. Since there have been two separate topics on implementation with over 5,000 views and 50 responses in total, let’s break down this proposal by discussing what it is and the benefits it brings to Solana and Terra. 

Proposal Background

On July 7, 2021, Jeff Kuan, working at Terraform Labs in business development,  published the following governance proposal on Agora: Bringing Terra stablecoins to Solana. He started by stating that a key metric for Terra’s success is the increased adoption and use of Terra stablecoins (e.g. UST) on Terra and other layer 1 blockchains (e.g. Ethereum, Cosmos, Polkadot, and Solana). The market capitalization of UST and other Terra stablecoins is crucial to a stronger, more sustainable and mature ecosystem, which will ultimately return value to LUNA. 

This is the recipe for Terra’s success, and we need governance proposals and community efforts to support that mission. However, the multi-chain world is still at an early stage of development and bridges take time for developers to deploy due to the complexity of interoperability.

Solana is a major network in the crypto ecosystem, and it doesn’t have an operational bridge to Terra. Solana only supports a native cross-chain bridge, Wormhole, that is currently only compatible with Ethereum. 

Knowing that Solana will be a cornerstone of the crypto ecosystem in the future, Kuan suggested integrating UST with Mercurial Finance, an automated market maker (AMM) based decentralised exchange (DEX) for stablecoins. This collaboration with Mercurial Finance is designed to drive liquidity, utility and awareness of UST by being part of Solana’s first multi-token stable pool. This is a great opportunity for UST since it is now part of one of the major liquidity pools, the UST-3Pool (USDC, USDT, and wUST). Furthermore, Ming, of Mercurial, pointed out how the concept of the Lindy effect impacts stablecoins. He stated that since acceptance and adoption are related to how long something has been around for, it is crucial for UST to have sufficient liquidity and liquidity mining (LM) incentives on new protocols launching on Solana. As explained on Agora, LM is a great tool to leverage for bootstrapping awareness and interest. Moreover, since Wormhole doesn’t bridge between Solana and Terra, native UST must be sent first to Ethereum and converted to wUST, and then users can bring it to Solana. It will benefit UST to be one of the three main stablecoins in this pool because it generates considerable revenue to liquidity providers in addition to the new tokenized version of UST now available on Solana. For example, by being part of the 8-week pilot incentive pool, Kuan projected an annual revenue of $1 million or $83,333/month, or $166,666 for eight weeks. To give a little more context, the proposal is an 8-week period to verify that the incentives are well designed with the different market participants and the protocol itself. Thus, this pilot period allows flexibility to change some parameters so that the pool size and user demand are positive. After eight weeks, Terraform Labs will build a strong and sustainable partnership with Mercurial Finance for the long-term implementation of UST. 

Proposal’s Result 

The proposal passed on July 27th with 99.30% of the voters supporting the proposal. The requirement was $167,000 worth of LUNA (roughly 24,000 LUNA at current prices) from the community pool to fund liquidity mining (LM) incentives. 

My Thesis on UST

The majority of the community thinks the proposal has an asymmetrical risk. This means that the success of this implementation far outweighs the loss in case of a failure. In my opinion, the big picture here is that UST is on its way to becoming one of the most dominant cross-chain decentralized stablecoins. In contrast to fiat-collateralized stablecoins (e.g. USDC and USDT) and crypto-collateralized stablecoin (e.g. DAI and cUSD), UST is a non-collateralized algorithmic stablecoin. 

UST maintains its peg through market arbitrageurs and real underlying demand for UST thanks to the rich ecosystem of applications built on top of Terra as well as the cash flow generated by staking LUNA. In other words, UST is backed by cash flow generated by staking LUNA and user activity on Terra.

Thus, Terra stablecoins are censorship resistant and offer one of the best available forms of decentralization, which aligns with the crypto space’s values. However, the design of UST is still very experimental and carries its own potential risks. For example, during last May’s crash, UST deviated to trade at $0.94 due to a series of LUNA liquidations and buybacks. Fortunately, Terraform Labs as well as the community resolved the problem quickly and implemented new measures going forward to reinforce the peg (see the Twitter thread here). For example, a new partnership was announced with Unslashed Finance. By offering insurance, market participants can now protect themselves from a peg deviation for a given period. Furthermore, from a positive perspective, we can see that UST has performed very well since its inception, with only a few deviations from the market volatility. (see the chart below).

UST Price History

In addition, there is a growing demand for UST…

UST Demand Growth

Finally, the highly anticipated mainnet upgrade, Columbus-5, scheduled for Q3 2021, will make it possible to fund the integration of Terra stablecoins with Osmosis, a Comos Zone AMM DEX. This will allow UST to navigate freely among any blockchains connected to Cosmos thanks to the Inter-Blockchain Communication (IBC) protocol. UST will become available to previously isolated blockchains. In other words, it's only a matter of months before UST becomes a cross-chain stablecoin.  UST is currently integrated with Ethereum, and soon with IBC enabled blockchains. Governance Proposal #110 is a unique and crucial opportunity to strengthen the vision of cross-chain adoption by having an early presence on Solana. 

Community Critique

There have been some excellent questions and issues raised in the last few days on Agora. Here are some of the key points retained:

  • What are some potential reasons the pilot would fail? 
  • Ming of the Mercurial team stated there is a risk that UST might not be chosen by liquidity providers because USDC is by far the most commonly used stablecoin on Solana. However, he assured the community that Terraform Labs and his team will work closely to drive the education and awareness of UST forward, including new marketing and awareness campaigns. wUST on Solana could lose its price stabilization due to the break of its peg linked to the minting and burning mechanism (see the seignorare mechanism).
  • Saber Protocol just launched their USDC-UST pool, is collaboration with this protocol planned? 
  • Kuan said that Terraform Labs is also in talk with Saber to launch liquidity mining incentives. Overall, UST needs to have a very high adoption rate within the Solana ecosystem to be successful. 
  • Are there any plans to encourage demand for UST once we have a liquid pool on Mercurial? 
  • Kuan said that despite the important discussions with other protocols, all future proposals should go through a governance vote. LUNA stakers are the ultimate decision-makers. 

What’s Next ?

It is important to note that there has been a lot of feedback and discussion around Saber, which led to the creation of a follow-up discussion by the same author, Jeff Kuan, called Bringing Terra stablecoins to Solana pt. 2 (and beyond). He suggested allocating an equivalent or greater amount of LUNA from the community pool in the last proposal, 24,000 LUNA or more, to fund the USDC-UST pool in Saber. To reiterate what was mentioned earlier, the main benefits of this proposal are similar to the previous one, namely to continue the integration of UST to the Solana ecosystem. To conclude this new proposal, Kuan brought up the following open questions:

  • How much LM incentives does it make sense to allocate to the USDT-UST pool on Saber?
  • Mercurial (24,000 LUNA over 8 weeks) can be used as a benchmark.
  • Given that there are multiple stablecoin pools on Saber, what would we want to see from the Saber team to make this attractive for the LUNA community?

Ultimately, the discussions around Mercurial and Saber will help to create a framework for future collaborations on liquidity mining incentives with other protocols across the crypto space. 

Protocol politicians, LUNA stakers and more broadly anyone who is interested in what is happening on Terra is invited to participate in the discussion here

If you are looking to delegate your LUNA and even become an active community member on governance proposals, check out Figment’s staking guide here. In the meantime, find me on Twitter to keep up with the latest news from the Terra and DeFi ecosystem.

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