UST: New Paradigm or Ticking Time Bomb? | Terra Bear vs. Bull

Hey Bankless Nation, we are super excited to host this live debate. This is a debate on Terra, Luna, UST, the stablecoin, the bull versus bear case. I asked this question on Twitter, David, and I think this is the question for our debaters today. Is Terra UST the future of crypto money?

Or is it a ticking time bomb waiting to explode? Got a lot of responses on crypto Twitter as a result of that question. And then two debaters stepped up to the plate and were also nominated by the community to take one of two respective sides. One is the bull case for UST and the Luna ecosystem, the Terra ecosystem. The other is the bear case. And so we have two representatives taking that side. And we're going to try to get to, I guess, uh the truth, or at least hear the arguments from both sides in this conversation. David, who do we have on the show today? And uh, do you have anything to add to that?

Yeah, of course. Coming in, in the left side of the ring, on the bull case, we have Jose Mikato from uh from Delphi Digital. And then in the right side of the ring, we have Jordi Alexander, Chief Investment Officer of uh Cellini Capital, uh, for the the bear case for TerraUSD. And I think really this conversation hinges on the question of do algorithmic stable coins can they work at all? And if they can work, has TerraUSD, has UST cracked that nut? We've seen many algo stable coins come and go. Uh lots of uh algorithmic stablecoin experiments on Ethereum, empty set dollar, dynamic set dollar. Um uh but we have not tried the experiment as a layer one until Terra came along, and so far that's been going pretty well with Terra. But that's still there's still a fundamental question as can an algorithmic stablecoin work in the long term? And I think that's going to be the main topic of what we are going to talk about today, along with all these other periphery topics as well, such as how is Anchor involved with this, the 10 billion of Bitcoin treasury that's being accumulated by the the uh Luna Guard Foundation, uh, and a few other things as well. Uh so Ryan, these are the focus, uh the the focus of today's show.

And here's why this is important, guys. Like Luna is valued at something like $30 billion, uh, you know, plus or minus. I'm not sure at the time of recording. UST is now $16 billion. Um, it's definitely making its way into all corners of DeFi. And so this is uh this is a substantial market cap for these assets. So we want to poke and see what's the viability look like for these assets? What do the growth prospects look like? Guys, before we get in, a quick announcement for you. I want to tell you a little bit about a fantastic NFT drop opportunity. And I think this is an opportunity for maybe first-time NFT buyers or early buyers who want to support a good cause. So it is National Youth, HIV and AIDS Awareness Day on April 10th. Uh and the Consensus NFT team and also Mac, that's MAC, the makeup company, have partnered together to launch a um a set of NFTs from the iconic Keith Herring. Okay, art by Keith Herring. There are three different levels you can get in on this NFT. Um the first starts at uh $25. So all of the proceeds from this, here's the cool part all of the proceeds, 100%, go to HIV AIDS issues um involving youth to support youth who are affected by HIV and AIDS. So really cool cause. And not only 100% of the sales, but also uh all of the resale value. So remember the cool thing about NFT is every time you sell an NFT, a royalty can be collected. In this case, it's two and a half percent. That also, on an ongoing basis, forever, goes to the same cause. Uh so coop super cool opportunity. We will include a link in the show notes, but if you want to memorize this, it's bankless.cc slash M A C. That's all capital M A C. And you can check this out. The the next step is really just uh sign up, get on their list so that when these NFTs come out, you will be first to know. Uh David, with that, man, I

I'm really excited about this panel because I feel like uh I haven't fully explored the Terra and Luna and UST ecosystem in the way I've wanted to. And I've been looking for an opportunity to sort of get both sides of the argument. So I'm excited to learn along with the guests. I probably have some, you know, preconceived notions coming into this, and I want to check those and see if they're true or not. But this is going to be a this is a very important conversation, probably one of the most important conversations happening in crypto right now. So super excited about this. You have anything else to add?

Yeah, it's it's extremely relevant. It's the talk of the town. Uh the Terra community is uh full of energy at the moment. And so I think Ryan, if we can do this show right, it will both be a zero to sixty in understanding the the Luna ecosystem while also having a good back and forth debate as to the the merits of the of the system as well as the risks of the system as well.

Well, there's your hype, guys. We will be right back with our two debaters, our two panelists. Uh, but before we do, we want to thank the sponsors that made this episode possible.

Alright, ladies and gentlemen of the Bankless Nation, here are our two panelists. Again, in the left side of your screen, we have Jose Mesito coming in from Delphi Digital. He is going to be arguing the bull case for Terra Luna. And then on the right side of the ring, we have Jordi Alexander from Cellini Capital arguing for the bear case for the Terra ecosystem and for UST. Jose and Jordi, welcome to Bankless.

Thanks very much for having me. Big fan of the show.

Hey guys, happy to be here.

Cheers, thank you guys for for volunteering to do this. I think this is gonna be pretty fun. And like I said, going into this, uh I think this will be an opportunity to go to uh teach a lot of the the bankless listeners, the bankless community who haven't uh uh completely dove in to the Luna ecosystem, all about Luna, while also providing the pros and cons, the benefits and the costs, the bull and the bear case for Terra. Uh and so I I'd actually kind of like to start at that high level of just kind of defining what we're actually talking about. And so uh Jose, I'd like to start with you. Can you simply just explain the fundamental properties of Luna and UST? Like what is what is the design philosophy and what are its goals, uh, and how does it achieve those goals?

For sure. Yeah, I know it's an educated audience, uh, probably more steeped in sort of Ethereum projects than

than Terra. So I'll try and use some metaphors there.

So I think the easiest way to understand Terra is actually through its product, which is UST, right?

So UST is a decentralized stablecoin. You can think of it as something similar to DAI,

but unlike DAI, which is built on top of Ethereum, um, UST exists on its own layer one, which is which is Terra, which is a Tendermint um proof of stake uh app chain.

So

for the ETH maxis or for the for for people who understand ETH, you can say like it's as if maker MKR token didn't exist, right? So it's like

ETH, just ETH and die, and you have no MKR in the middle, uh, so all the value would would accrue to ETH, and you'd have like die sort of built into the layer one level, into the into into the ETH layer one.

And then, so how does UST itself work? So, in terms of mechanism design, it's actually different from Maker, right? So, Maker is a is a debt-based stable coin.

Um, UST is more similar to an algorithmic stablecoin that has existed on Ethereum before. You mentioned some of them, uh ESD, DSD,

et cetera.

Um, where basically the way you mint UST is by is by burning Luna, and the way you burn UST is by minting Luna.

And so this gives Luna a really interesting role in the Terra ecosystem, right? Where it's both the staking token, uh, like it would be for a proof of stake chain, but it's also the share token and the governance token for this for this decentralized stable coin,

right?

Um

and so in a sense, it secures both the tick uh the systems like technical sort of consensus risk, but also the stablecoins financial and economic risk.

This also me gives Luna like unrivaled value capture, I would say, at layer one, right? Because unlike most layer ones, which just capture value from transaction fees, uh, Luna actually captures value in the growth of its main stablecoin. And since stable coins are crypto's killer app on pretty much every chain, uh Luna like basically verticalizes it's like vertically integrated, and it also captures the value from its from its main and like most successful

uh application.

So, and then in terms of contextual data that might be useful to your users, uh to your listeners, sorry,

UST is the is the biggest decentralized stable coin by by market cap. It's at roughly 16 bill right now.

It's also probably about to be the most liquid with the four-pool. Maybe controversial, but uh yeah, it's probably about to be the most liquid.

I would also argue, and I'll argue later, that it that it's the most decentralized in a certain sense.

Um and then Luna has its own layer one ecosystem, which itself is thriving uh in the sense that it's it has around 30 billion in TVL. It's the second largest L1 by TVL. It has core primitives for a lot of the stuff that you'd see on Ethereum, uh, savings, credit,

um, exchange, perps, also an NFT, like a bunch of NFT marketplaces, a bunch of a bunch of dope NFTs. So yeah, um that that's I'd say like a high level intro to to Terra.

So, Jose, I'm gonna ask Jordy uh to add to that, but just just to kind of summarize, the to taking from maybe the Ethereum paradigm, right? So it's it's as if a layer one like Ethereum, that's what that's what Terra essentially is, had an algorithmic stable coin almost baked in, tightly coupled to its pr uh core protocol. And the value of that algorithmic stablecoin was somewhat sort of linked to, in an algorithmic way, ETH, the asset. So the L1.

Going.

Asset itself. And

It's like the senior if the seniorage accrued to ETH, right? Like the growth in imagine if the growth in DAI all accrued to ETH or or in the centralized stables all accrued to ETH.

right. And that is not the only uh USC, of course, is not the only application on uh Terra. Terra also has, you know, general purpose smart contract uh layer where it has other sort of DeFi applications as as well. But it it does have this special status almost like um protocol almost protocol native. I don't know if that's too strong a term. Would I say, would you say protocol native, or do you still consider UST a separate app that is distinct from the protocol?

No, it's it's it's a native, it's it's protocol native for sure. So it's it's minted and burnt at the protocol level, and Luna and UST are the are both the two uh protocol native tokens.

So that that is helpful because we can't really talk about UST without talking about Luna. So I think for um listeners listening to this, when we say Luna and UST, you know, sometimes we'll use them somewhat interchangeably, but of course UST is is sort of the the stable coin pegged aspect, but it is almost a product of Luna. And these two things might be used somewhat interchangeably uh in this episode. Jordy, um what would you add to this? Is there anything you would add to uh Hose's description or anything you might disagree with?

Um, I mean, in terms of the analogy to Maker and some of the you know

stable coins that people might be familiar with, like DAI, for example, that are overcollateralized,

um, the difference is that in a way, UST is collateralized by the value of the underlying chain in itself, by the L1.

Um, but instead of a model where you are necessarily changing your UST for Luna,

instead it is adding inflation to the system. So imagine if somebody wanted to get rid of their die.

Instead of getting Ethereum from somebody, the system would literally just print new Ethereums

and just kind of bestow those Ethereums onto the person that has DAI. So, in a way, like the DAI is an extension of Ethereum where you could just get more Ethereum created from that system. Of course, the problem we know with inflation is that it reduces the price.

And that's kind of why historically these things have always failed because as you create inflation, you reduce the price.

You get into a death spiral where you know

the underlying price is going down, and then you know, people want to redeem more, and then there's like a rush for the exit.

And if you find that

there is not enough exit for everybody,

uh, some people are kind of left holding the bag,

and usually things go to zero in that case. That's kind of what we've seen historically, at least.

So I think to bolster this conversation uh and Jordy, you just touched on it a little bit and Jose also touched on it, but I want to make this a little bit more formal. There's a relationship between the value capture of the Terra ecosystem and then the Luna token and then also the UST token. And I I want to kind of uh go back through this again. Uh Jose, when the Terra ecosystem captures value, how does it manifest in the supply of UST versus the uh unit price of Luna? As in like the market cap of Luna versus the total supply of outstanding UST. When the Terra ecosystem grows and captures value, how does how does it get balanced between these two tokens? How does that happen?

Yeah. So when there's um demand for for like excess demand for UST, UST will trade above a dollar, right? And and at that point,

There's an incentive for someone to go and burn some Luna in order to mint UST

and then sell it on the market and collect the arbitrage, right? With Luna providing kind of that layer one oracle price that sets how you can mint and burn UST.