The Terra Classic community is considering bringing back the failed terraUSD Classic (USTC), which collapsed last year. Terra Classic is the original network created by Terraform Labs and has been operating independently as a blockchain. Members of the community have been discussing a new model that includes token buybacks, staking, unidirectional swaps, and an “algorithmic peg divergence fee” to address the issues that caused the original USTC to fail.
Algorithmic stablecoins like USTC are backed by a basket of assets, such as LUNA and bitcoin, without depending on any centralized third party to hold those assets. However, most of these tokens often experience a “death spiral” caused by outflows or sales of backing assets that lead to sudden de-pegging of UST-like projects.
Terra community’s new mechanism
According to RedlineDrifter, a divergence fee mechanism could be used to charge a fee equal to the difference in price between the peg and market price of USTC, ranging from 0% at the peg to 100% at a 50% deviation from the peg. This design would disincentivize selling below the peg and incentivize buying to ensure the accrual of the more desirable asset, i.e. USTC or tokens that back it at that time. The protocol would retain the fees to buy back USTC and maintain the peg, and the mechanism would be implemented across all USTC trading pairs both on and off-chain.
RedlineDrifter also proposed a USTC staking tool to drive capital toward the token and increase its price appreciation. To bring utility to USTC and take it out of circulating supply, a new savings/staking module for USTC with 1-month, 6-month, and 12-month lockup periods with increasing reward rates for longer lockup periods could be created.
Community members say that a fully-decentralized token is required to create a decentralized economy, and Terra believes that markets that heavily rely on centralized stablecoin lenders such as Tether Global and Circle go against the ethos of cryptocurrencies. However, Terra’s creator, Do Kwon, is currently wanted by prosecutors in South Korea for his role in the project, and his co-founder Daniel Shin was recently indicted in South Korean courts