Add support for Terra USD (UST)

Hi Aave community, this is a proposal to onboard UST and serves as a follow up to the original proposal submitted on April 20th, 2021 by the Terra team here.

I’m resurfacing this proposal now because the Terra team has begun its migration away from its centrally held Shuttle Bridge to Wormhole’s more decentralized solution (more references on Wormhole below). Wormhole operates as the decentralized, intermediary oracle network that observes and verifies messages on one chain and relays them to the other chain — relying on the consensus and finalization of the connected chains to ossify state changes conducted between interacting chains. Shuttle bridge will utilise Wormhole’s token bridge as the back end infrastructure, while maintaining the same front end UI. The move to Wormhole should lower the risks associated with a centrally held bridge while also expanding UST’s access to more chains and thus utility to Aave. Wormhole is connected to ETH, Terra, BSC, and SOL with Polygon and presumably more chains in the future.

I’ll focus this proposal on UST with some information about Wormhole included for additional context.

Terra References

· Terra

· Whitepaper

· Docs

· Terra github

· Etherscan

· ChainLink Oracle: WIP

· Audits: CertiK Security Leaderboard - Terra

· Terra communities: Telegram Discord

· About Terra’s plans to migrate from Shuttle to Wormhole

Summary

TerraUSD (UST) is an algorithmic, seigniorage-based stablecoin issued by Terraform Labs (TFL). Its market capitalization has grown to almost $2.8B (​https://www.coingecko.com/en/coins/terra-usd​) since its inception on October 1. UST is designed such that each UST can be redeemed for $1 of LUNA, and vice versa. This has kept the price close to the peg, which is essential for a stablecoin.

Motivation

The Terra community and use of UST has grown substantially since the original proposal was submitted a few months ago (swelling from a $1.8B market cap to $2.8B in that time). They’re committed to a multi-chain strategy and as such are motivated to find vibrant borrowing/lending markets for UST on all of the chains where UST is supported. Eth continues to be the top destination for assets from the Terra ecosystem.

UST is supported by major dApps including Curve, Uniswap, Sushi onsen, Harvest, etc. UST can also be deposited into Mirror Protocol mAsset pools on Uniswap, and is depositable into Anchor via EthAnchor (EthAnchor - Anchor Protocol ). We believe there will be sufficient demand for borrowing/lending given the variety of existing use cases.

Finally, as referenced earlier, Terra has begun its migration from its centrally held bridge to Wormhole. This move should lower the previous risks associated with UST while increasing its adoption case as it reaches more chains via Wormhole in the future.

About Wormhole

Wormhole References

· Website, token bridge, and other helpful Wormhole links

· About Wormhole

· Wormhole’s github

· Wormhole’s discord

· Wormhole’s Twitter

· Wormhole Stats

· Wormhole’s Explorer

Specifications

  1. What is the link between the author of the AIP and the Asset?

I am a member of the Wormhole team.

  1. Provide a brief high-level overview of the project and the token

Terra is the team behind Anchor Protocol and Mirror Protocol. UST has been live since October 2020, and has held peg well. The number of unique holders of UST has also grown substantially since the last post and we expect that figure to grow as UST launches on more chains.

Curve volume of UST has doubled since the April proposal.

curve ust volume

  1. Explain positioning of token in the AAVE ecosystem. Why would it be a good borrow or collateral asset?

As a stablecoin, it’s maintained its peg, particularly over periods of market volatility. And as mentioned above, we believe there will be sufficient borrowing/lending demand for UST given there are a variety of existing use cases.
UST stability

  1. Provide a brief history of the project and the different components: DAO (is it live?), products (are they live?). How did it overcome some of the challenges it faced?

Terra is the team behind Anchor Protocol and Mirror Protocol. Mirror has $1.6B TVL, and does ~$11.2M in daily volume. Anchor has ~$5.1B TVL. KRT is Terra’s oldest stablecoin which was launched in 2018, and has been able to maintain peg for the last 3 years.

  1. How is the asset currently used?

UST can be used on most of the major dApps - including Curve, Uniswap, Harvest, Sushi, etc. as well as on Terra applications such as on Mirror mAsset pools and ethAnchor.

  1. Emission schedule

There is no emission schedule. Whenever there is fluctuation in demand for UST that causes the price to go off peg, $1 LUNA can be swapped for 1 UST, and vice versa.

  1. Token (& Protocol) permissions (minting) and upgradability

As referenced above, we believe the main concern with adding UST was its centrally held bridge solution. With the adoption of a decentralized bridge, UST should be a strong addition.

Given the history and robustness of Terra’s stablecoins over the last 3 years, we believe that the addition of UST would pose low risk to the Aave ecosystem.

  1. Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)

Market cap: $2.8B total, $412M on Ethereum: $1.01 | Wrapped UST Token (UST) Token Tracker | Etherscan
24 hour volume: $100M
Volatility: peg has maintained stability well
Exchanges: Curve, Sushiswap, Uniswap, Balancer, Kucoin, Bittrex, Terraswap, Coinbase, MEXC, Gemini, Bitfinex

  1. Social channels data (Size of communities, activity on Github)

· Communities: 25k in Telegram, 16k in Discord

· Terra github

  1. Contracts date of deployments, number of transactions, number of holders for tokens
    No. of transactions: 354,000
    No. of holders: 17,816
15 Likes

As a user, I would like to see UST get added.

4 Likes

It makes a ton of sense to list UST for Aave. Having a non-ethereum native censorship resistant stablecoin is a good addition to the current stables. I would use it.

4 Likes

In light of the SEC report from the president’s working group related to stablecoins. Adding functionality for a decentralized stablecoin not tied to USDC/USDT (asset backed coins) would be prudent. If these entities are regulated as deposit institutions, as the SEC advises, we will see extensive capital flight away from them, and adding an option not in that bucket makes a lot of sense.

8 Likes

massively in favor of adding UST to Aave. both as collateral and lending / borrowing

2 Likes

Please we need a decentralized stablecoin.

+1 for this. Looking forward for UST to become the based pair for everything!

I see adding UST and front running any potential regulatory issues with fiat backed stablecoins (USDC/USDT) as a positive. If users don’t trust the on-chain incentives in the terra ecosystem to maintain UST’s peg, then no one is forced to use it. But having it there as a backup option for users in case s*** does hit the fan with centralized stablecoins seems like the smart thing to do.

1 Like

+1 on this!

A censorship resistant and decentralized stablecoin is very important for DeFi. The regulatory pressure on USDT/USDC won’t stop and Terraform Labs / Terra Luna is a proven ecosystem. The peg stability has been greatly improved after the last crash. Many blockchains already onboarded UST / WLuna and Aave would be a great catalyst for further adoption.

Aave on Harmony with UST as a pilot? ;)

2 Likes

+1 Yes please, add it.

1 Like

YES. Not having UST is pretty ridiculous at this point. Let’s do this!

1 Like

+1 for this.
Very much in favor of adding UST

@wormhole - congrats on the early success of your product.

I was particularly intrigued by this comment.

Is this focus due to data your team has on swaps? Or is it an attempt to incentivize more swaps into the Terra ecosystem? I imagine the timing of this proposal is to help boost fee revenues on Wormhole.

As proponents and partners of Terra, we support this proposal. We believe DeFi protocols with more choice, flexibility, and multi-chain support will win the most users.

@wormhole - have you seen Aave’s V3 proposal? Introducing Aave V3

Here they introduce a “portal” for users to swap assets in and out of different networks. However, there is no mention of Terra and UST in this deployment.

I wonder if there is opportunity for Wormhole to partner with the Aave protocol to add this feature and help contribute to the development of V3.

Diversifying access to stablecoins, especially those with robust token-economics is a worthwhile investment for Aave.

1 Like

We are supportive of this proposal. UST is one of the largest decentralized stablecoins with significant off-chain/on-chain liquidity and a track record of stability. Aave uses Chainlink oracles - according to this list, UST is already supported. Here are some potential risk parameters to start (open to feedback):

  • Base LTV As Collateral: 0
  • Liquidation Threshold: 0
  • Liquidation Bonus: 0
  • Borrowing Enabled: true
  • Stable BorrowRate Enabled: false
  • Reserve Decimals: 18
  • Reserve Factor: 2000
4 Likes

Hello,

Terra ecosystem and community are great and I can only see synergies with the Aave ecosystem.

That being said, V3 might be just around the corner so I’m only supporting UST with a 0% LTV collateral factor for V2.

If the community agrees on supporting V3 LTV can be increased by AIP in the context of risk exposures.

That’s why I voted no on the current snapshot proposal at 75% LTV.

2 Likes

Definitely in favour, UST would be a great decentralised stablecoin to add next to DAI (which is still almost 15% backed by centralised USDC and USDP).

3 Likes

Hi @wormhole

Thanks for this proposal

You mention in the ARC that the migration to a decentralised bridge has began. What is the timing for full transfer? Is the decentralised bridge well bootstrapped and battletested?

Looking forward to seeing the risk assessment as described here New Asset Listing - Governance

Here’s a detailed risk methodology Methodology - Risk

UST Risk Assessment

ParaFi is in support of adding UST to AAVE v2 and v3. UST on AAVE will likely drive additional stablecoin liquidity and borrow demand to AAVE.

The version of UST added will be USTw (Wormhole UST). This is due to Terra migrating from the centralized Shuttle Bridge to the decentralized Wormhole V2 bridge. The Wormhole Network underpins the bridge with a validator set that observes the chains it’s connected on. The Network is governed by 19 guardians that watch connected chains and sign message observations. Users deposit funds onto the token bridge from where their tokens are originating (e.g. UST on Terra) and the action is deconstructed into a message which is sent to the Wormhole Network who validates it and produces a signed message. The signed message is sent to the output token bridge (e.g. USTw on Ethereum) which verifies it and sends the user the wrapped bridge tokens.

The UST peg to $1.00 is maintained through an open market arbitrage system facilitated by Terra’s market module. An explanation of the contraction system is outlined below from the Terra docs.

If 1 UST is trading at .99 USD, users can buy 1 UST for .99 USD. Users then utilize Terra Station’s market swap function to trade 1 UST for 1 USD of Luna. The swap burns 1 UST and mints 1 USD of Luna. Users profit .01 UST from the swap. This arbitrage continues, and UST is burned to mint Luna until the price of UST rises back to 1 USD.

The reverse works if 1 UST is trading above 1.00 USD. Through this system, UST has been able to maintain its peg within a relatively tight range.

USTw Smart Contract Risk: C

Onboarding UST takes on smart contract risk from two sources: the wrapped UST on Ethereum and the UST contract on Terra. The Terra codebase has been extensively reviewed.

The wormhole Terra contracts have been developed by Certus One (part of Jump Crypto) and audited by Kudelski. The wormhole v2 contracts are in active development.

The wormhole Solana/Ethereum/Polygon contracts have gone through sufficient use, transferring a variety of assets cross chain. For reference, there have been 8500 Solana transfers on the Wormhole V1 contracts and 650 on the V2 contracts.

USTw Market Risk: B

The peg mechanism does have a possibility of failure - the most apparent case would be in a flash crash / extreme market downturn. However, we analyzed the UST Curve Pool from December 23, 2020 and observed that UST has generally stayed within an acceptable range. Simulating 50,000 UST → USDC swaps over our time range, outside of three past outlier events (where UST was +5%, +2%, and -6%), UST has almost always been within a very close range to USDC on a 50,000 unit swap basis.

USTw Counterparty Risk: C+

Since Wormhole has recently added USTw, it has a small number of holders (38). However, with the centralized Terra bridge being retired, users will need to use the Wormhole bridge to move assets back over to Terra. 85% of the tokens are being held in the protocol owned Shuttle->Wormhole pool, which will distribute naturally as the 20,000 holders of wUST migrate over. Another 11% of the USTw tokens are held in a Curve contract to bootstrap liquidity.

Proposed Risk Parameters:

  • Strategy: rateStrategyStableTwo
  • Base LTV As Collateral: 0
  • Liquidation Threshold: 0
  • Liquidation Bonus: 0
  • Borrowing Enabled: true
  • Stable BorrowRate Enabled: false
  • Reserve Decimals: 18
  • Reserve Factor: 2000

Rationale

To mitigate concerns, a 0% collateral factor will allow UST to be supplied or borrowed - not used as collateral. This limits risk for Aave and its users in other markets. As the wormhole contracts continue to be used and UST gains further adoption, the collateral factor can be increased.

We welcome feedback on these parameters.

2 Likes

With only 650 transactions it seems you have underestimated the V2 wormhole smart contract risk which is closer to D or D- {if its the V2 contracts that are used why are you accounting using the V1 transactions?}

Delphi Digital supports onboarding UST to AAVE v2 and v3.

Stablecoins have become the backbone of DeFi amidst the parabolic growth of the overall crypto market, with over $140b in cumulative market cap. Of this, nearly 80% of these are composed of centralised alternatives like USDT and USDC.

However, centralized stablecoins face counterparty risks with issuers who mismanage funds as well as censorship risks, particularly from regulators - we have already seen increased regulatory scrutiny in the US. Risks associated with centralised stablecoins also spill over to certain decentralised stablecoins who use centralised stables as collateral, such as DAI and FRAX.

We believe UST is the only decentralised stablecoin operating at scale which has managed to maintain its peg whilst not being backed by centralised collateral. It is currently the 2nd largest decentralized stablecoin by market capitalization and has been growing at an exponential rate over the last few months. We anticipate that the burgeoning terra ecosystem will drive UST demand higher. Thus, allowing UST to be supplied/borrowed will benefit Aave as it will bring a flow of liquidity and TVL in the form of UST tokens.

Top Decentralized Stablecoins by Market Capitalization

Source: CoinGecko, 23 November 2021

As @Anjan-ParaFi mentioned, UST’s peg mechanism does have a risk of failure, however the UST peg mechanism has proved to be rather robust during torrid market environments, quickly returning to peg.

To put into perspective, other stables that Aave has since onboarded have similarly deviated from peg in the past, at times to a greater degree than UST has.

Price Action of Select Stablecoins listed on Aave v2 vs UST

Source: CoinGecko, 23 Nov 2021

To further strengthen UST’s peg mechanism, the Terra team is planning to purchase Bitcoin and other decentralized assets to partially collateralize UST, effectively acting as a backstop. Partial collateralization of UST has been extensively discussed here, here and here. Do Kwon the head of TFL has made it clear that this is a priority for TFL to implement. We believe these measures further de-risks UST and will dampen it’s deviation from the $1 target even more.

We agree that listing UST beginning with a 0% collateral factor is a prudent measure to take, siloing off the risk of UST. This collateral factor can be revisited later, as partial collateral is added along with additional utility for UST brought by the upcoming application launches on Terra.

Disclosure: Delphi Digital and members of our team are invested in LUNA and AAVE. Delphi Labs is also incubating several projects on Terra. These statements are intended to disclose any conflict on interest and should not be misconstrued as a recommendation to purchase any token.

4 Likes