How Stablecoins Outlasted Instability

On June 20, Justin Sun, founder of the Tron blockchain, revealed his thoughts about a wide range of issues related to stablecoins, which were at the time under great stress in the wake of the Terra collapse. He sat down via teleconference with CoinDesk deputy editor Zack Seward, who started the discussion by asking about the then-prevailing market conditions.

“The market is going through a very painful deleveraging process,” Sun replied. “Ethereum is the top-one target since the majority of the older funds and leading platforms all have large leverage positions in Ethereum.”

He noted that the timing of Ethereum’s transition from proof-of-work to proof-of-stake consensus fed into the uncertainty.

“Right now, we need time to heal and time to build,” Sun said, predicting that the deleveraging could take “another three to six months.”

Sun noted that, in the wake of the collapse of Luna’s token pegged to the U.S. dollar, the market for algorithmic stablecoins was especially precarious. Rather than being properly collateralized, like such centralized stablecoins as tether (USDT) or USD coin (USDC), an algorithmic stablecoin’s value is determined by decentralized means, so it has greater transparency and thus presents a greater potential for panic.

His interest in stablecoins is tied to USDD, the TRON-native token pegged via a Linked Exchange Rate System (LERS) to the U.S. dollar. The week before the interview with Seward, though, USDD slipped off its peg. It fell to $0.93 and had only begun to recover. Its short trading history – it launched at the beginning of May – was working against it.

In the webinar, Sun made a bold prediction that USDD would return to its peg within “five to 10 days” – a prediction that turned out to be entirely accurate. It only took seven days to round up to $0.99 and has been within a fraction of dollar parity since July 8. By the more modest goals Sun noted in the discussion, though, USDD was in complete compliance with its mission except for a six-day stretch ending June 21.

Under “extraordinary market conditions,” Sun said, a slip of “two to three percent is an acceptable range” for a decentralized stablecoin.

Sun attributed the June dip to short sellers at hedge funds. Tron DAO had to add reserves to ensure liquidity and reverse the losses. He denied deploying any personal capital.

“I still believe [a decentralized stablecoin] has huge potential to become the next big settlement token for the crypto industry,” Sun said.

He quickly added that any theoretical advantage such a token would have can be lost to poor design or management.

Sun said he expects centralized stablecoins will be regulated at the national level.

“Centralized stablecoins will eventually be regulated as a bank because they receive lots of money from other people,” he said.

Decentralized coins, such as Tron’s USDD, can avoid that though, as long as they can make the case to financial watchdogs that there is an inherent difference between the decentralized finance (DeFi) and centralized finance (CeFi) approaches.

He suggested that, rather than being under the microscope of central banks, algorithmic stablecoin projects can benefit from learning the lessons of these monetary policy setters. He cited both the U.S. Federal Reserve and the People’s Bank of China as examples, as well as the Hong Kong Monetary Authority, which is essentially their translator.

Ultimately, Sun believes in a free and open market for currencies, whether they be sovereign or private, and cites a Nobel laureate from the Austrian school of economics as inspiration for his thinking.

“I am a big fan of [Freidrich August von] Hayek,” he said, referring to the mid-20th century economist whose theories informed subsequent libertarian political movements. Sun added that he is in favor of “a transparent, open, competitive currency market. The ideal scenario will be that all the [central bank digital currencies] will compete with all the private stablecoins.”

While he expressed skepticism that central bank digital currencies (CBDCs) would conform to open-source transparency and would instead “be opaque, permissioned chains,” he still said he was open to working with them and competing against them.

“At Tron Protocol, we are happy to collaborate with all central banks,” he said.

The “we” is telling. Although Sun is technically retired from a leadership role at Tron, he is still passionate about the project and is a huge, if not the biggest, supporter of the Tron community and ecosystem at large.

His full-time job now is as a diplomat. The Chinese-born, American-educated Sun now represents his adoptive home of Granada at the World Trade Organization. (Seward noted that Sun’s title these days is “His Excellency.”)

Since the beginning of the year, Sun has participated in a suite of activities, including the 12th Ministerial Conference at the WTO’s Geneva headquarters. These have not been specific to cryptocurrency at all but dealt instead with such momentous issues as COVID vaccine waivers, soaring food prices, Russia’s invasion of Ukraine, transfer pricing and e-commerce taxation.

Sun also responded to a cheeky question from a viewer about whether Tron “cut-and-paste” its white paper from Ethereum’s in 2017. He noted that Tron always relied on proof-of-stake consensus, a move that Ethereum has consistently espoused but long delayed.

“In 2022,” Sun said with a broad smile, “Ethereum is copying Tron.”

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