- UST and LUNA’s crash turned out to be a huge blow to crypto as a whole.
- However, it also taught the industry several important lessons.
- Using this understanding, Source was able to build resilience into its Stablecoin USX.
The attack on UST and LUNA was a devastating blow to the crypto space and to the trust and progress of DeFi, leaving many investors second-guessing the capabilities behind this technology. If a multi-billion dollar attack can destroy a top 10 crypto such as Terra LUNA, what can stop that from happening to any DeFi crypto project or protocol?
While the threat is a major concern and needs to be acknowledged, like with any failure, there is much that can be learned in order to forge a more secure and resilient future for DeFi and Web 3.0.
Is the crash of UST the end of decentralized money? No. If anything, the booming success of UST before its crash is major proof that a sustainable and secure stablecoin and decentralized economy is in high demand and is just around the corner. Source Protocol is focused on pioneering one of the most resilient ecosystems ever built, and to do this, a resilient, secured, and reliable foundation must pave the way forward.
The first lesson to be learned from the LUNA attack is that a stablecoin model should never include 100% of its backing from a speculative asset. This was LUNA’s greatest error and lack of foresight. They assumed, regardless of any potential scenarios or attacks, that the market would see LUNA as valuable and that the algorithm could adjust accordingly to any market change.
This was clearly not the case, despite all of the underlying tech. This is also a case study showing how all speculative assets, regardless of tech, are vulnerable to massive market dumps if a significant attack is executed. It therefore strongly suggests that a solvent growth model for crypto assets is the only possible way forward to mitigate the effects of market volatility and reduce the probability of successful attack scenarios.
This can be done by over-collateralizing assets with one-to-one USD, or more, verifiably-asset-backed stablecoins. This is why solvent growth through trusted and live-audited asset backing is a fundamental building block of Source Protocol’s stablecoin — Source USX — and the entire ecosystem.
It was a very painful position to be in for the many developers of the Terra ecosystem, many of whom lost years of hard work and sacrifice in a matter of days. Their decision to move their development to a new network should not be taken lightly. These developers need to know that the ecosystem they choose to build on is doing everything fundamentally to secure a future where their dApps and technology can rely on a strong and resilient platform. Source Chain (SOURCE) aims to provide this.
The Terra Luna blockchain is a Cosmos SDK built blockchain and has seen significant development of dApps and DeFi products built on top of it. The attack on UST resulted in a massive throughput of transactions in a short time span, as users attempted to liquidate their UST and LUNA.
During the liquidation frenzy, the Terra Luna blockchain was able to continue running and process transactions without failure. This is significant for those who have witnessed the disruption and congestion of prominent networks like Ethereum from a single booming application — Crypto Kitties is an example. It also gives further credence to the Cosmos SDK architecture and design for being able to withstand such a large amount of transaction activity without failure.
It is important to note that all Cosmos SDK built chains are capable of processing the same transaction volume and resilience that the Terra LUNA chain experienced. While this may be a small sliver of data, it is testament to the throughput capability of Cosmos SDK built chains and justifies why SOURCE is being built in the Interchain/Cosmos ecosystem. More information on SOURCE will be available in the coming months.
Building Resiliency into Source’s Stablecoin USX
As for stablecoins, just saying the word may carry a bitter taste in investors’ mouths for a period of time until faith in trusted stablecoins is restored. The Source Protocol team is working hard to mitigate multi-billion dollar attack scenarios to its own native stablecoin Source USX (USX), as it has always been a threat scenario that has to be considered.
USX is fully over-collateralized in the Source Marketplace by a variety of stablecoin and blue chip crypto assets that meet specific requirements based on volume, market cap, liquidity factors, etc. Each of these assets has been successful and secure for a number of years now. USDC, DAI, BUSD, and TUSD, have a solid and solvent track record to date. The security and transparency of Tether, the crypto market’s most popular stablecoin is debatable for another time.
USX can only be minted/borrowed when a user locks up their assets using a smart contract on the Source One Market. Similar to Aave and Compound, Source One Market is a non-custodial, peer-to-peer DeFi application that allows users to deposit their crypto assets to earn interest and borrow against those assets without selling them. A credit limit is issued based on how much is deposited and what asset, in other words, how much collateral is supplied by the user and which cryptocurrency.
It is important to note that this credit line is limited to 40% or less of your collateral factor, to further prevent any type of insolvency issues brought on by an attack. In other words, users can only borrow USX up to 40% of the credit line that they are provided, based on what they have supplied to the market. The user pays daily interest on any amount borrowed from Source One Market until the borrowed amount is paid back. When a borrowed asset is paid back, the borrowed tokens are burned by the contract and the original collateral is available for the user to withdraw.
This non-custodial approach for minting USX provides more security and makes it difficult to attack. Source One Market also provides USX with an additional layer of security due to the fact that it is backed by a hierarchy of stablecoins and assets, each with its own collateral factor. The collateral factor is set on every asset listed in the market and is controlled by governance.
The collateral factor on each asset allows for over-collateralization of USX and also the ability to set a hierarchy of trust behind each asset that backs it. More trusted assets like USDC will have a higher collateral factor, while less proven or less trusted assets will have a lower collateral factor.
Should Luna’s UST have been listed in Source One Market during the LUNA attack, its collateral factor could have been immediately set to 0. While this may set an over-leveraged and over-borrowed user up for liquidation, it will protect the responsible users and also protect the backing of USX.
Theoretically, all stablecoins in Source One Market would have to be attacked and lose their peg simultaneously for USX to be at risk. If that were to happen, the collateral factor of those stablecoins would be set to zero, and collateral factors on safe assets would be increased. This would give users time and the ability to pay back their borrows on the attacked asset before any liquidations could occur. This is an incredibly instant and effective, dynamically responsible mechanism that is proprietary to USX.
In conclusion, as the diversification and hierarchy of stable assets backing USX expand, threat levels are reduced, and security increases. This design also makes USX an excellent hedge as it would require a nuke of all backing assets to go off simultaneously to come close to destabilizing or hurting the USX peg. The possibility of an event like this is extremely unlikely, and if such an event were to occur, the entire 1.5 Trillion Dollar crypto market would be rendered useless.