7. UST is seriously depegged. What now?

Written by the Phezzan team

If you are a UST or Luna holder, we feel you. It must be very hard to be in this extreme market.

Earlier in April, we posted our thoughts on UST depeg (https://learn.phezzan.xyz/phezzan-academy/random-thoughts-from-the-phezzan-team/3.-any-contingency-plans-if-ust-depegs-in-extreme-stress-or-and-regulatory-challenge). Our thoughts was UST has depeg risks, and we have a plan to mitigate this, including using TWAP of UST price and adding multi collateral in our V2.

But who could have thought the depeg can come this quickly and this seriously? If the past can provide any comfort, major stablecoin USDT had endured serious depeg in the past as well. It dropped to $0.56 in 2015, and $0.85 in 2017.

Young stablecoin protocols have to go through this phase, as there are incentives to cause the depeg and then profit from shorting the protocol token. As the marketcap of stablecoins go larger, it will cost more and more money to start the attack. At some point, such attack won’t make any economical sense any more, as the expected return on attack will be hugely negative.

The debate between Jordi and José (https://www.youtube.com/watch?v=6eOU5OaKd8s) puts it nicely: decentralized stablecoin is a trillion dollar market; UST is a market leader, but there are too many uncertain risks and there is no guarantee it will come out at the other end.

Nothing has shaken our faith that decentralized stablecoin will be huge some day. But will the Luna survive this depeg? To be honest, we don’t know. But we are still bullish on the ethos behind Terra/Luna, and will be rallying behind Terra and its community to go through this darkest hour.

If UST survive and come out at the other end, there are many issues to be addressed. On the UST side, how can UST endure extremely downward market? If Bitcoin reserve still proves to be too volatile, what other measures should Terra/UST include? Is there any incentive to discourage dumping for depeg? One can’t just assume the market will just go up and right.



On Phezzan’s side, one thing is clear that we can’t let UST to be our single point of failure. Our protocol can’t just depend on one single token as collateral. We will make multi collateral support one of our top priorities in our V2 design. Diversification of collateral should greatly reduce the risk of system wide liquidation.

Also, we most likely need more asset in our insurance fund than we originally thought. Should we have non-UST based stablecoins in our emergency vault? We haven’t discussed internally but the answer is probably yes. That is something we can already do in V1 to mitigate the risk on UST failure.



This depeg is a great lesson for Terra and Phezzan. The protocol needs to be anti-fragile, and resilient to market volatility.



The UST issue should resolve itself one way or another in the next couple of days if not weeks. Our thoughts and prayers go to those defending the UST peg and the value of decentralized stablecoins.

Until then, stay safe. We are here with you in the darkest hours.