Add support for Terra USD (UST)

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.

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+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? ;)

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+1 Yes please, add it.

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

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+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.

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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
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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.

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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).

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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.

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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?}

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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.

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Decentralization is the cornerstone attribute that separates cryptocurrencies from fiat. Stable coins are the cornerstone for conducting Defi. UST is both, which will help in diversifying the type of stable coins currently in use, ensuring a more robust environment to nurture the growing Defi space.

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Very much in favour - have been researching and involved with Terra and UST for the majority of the year and I can second the stability of UST, the dynamism of the community and the unique properties UST can offer to Aave.

@Anjan-ParaFi thank you for completing the risk assessment. It is exceedingly helpful in understanding the proposal.

I am interested in understanding how you arrived at a B for the market risk element and perhaps you and the rest of the community can help me. Perhaps if I provide some questions it will explain

You say a little about the market risk which is “The peg mechanism does have a possibility of failure”, “UST has generally stayed within an acceptable range”, “outside of three past outlier events … UST has almost always been within a very close range”. That sounds kind of negative. You know a bit like “All went well except when it didn’t”. So is a B grade appropriate?

The risk parameters are very strong, which I think is sensible. The reasons given are because of the high risk. This seems to acknowledge that the market risk is perhaps quite significantly high: “To mitigate concerns, a 0% collateral factor will allow UST to be supplied or borrowed”. Does this sentiment match up to the B grade?

In the event of a regulatory crackdown on centralized and asset backed stablecoins, are we sure that algorithmically backed stablecoins will be in a better position? The reason I ask is because I suspect some regulators will not make a distinction and so I’d see a crackdown on all stablecoins at the same time to be likely if such a crackdown were to happen. So I don’t really see how using an algorithmic coin would be protection against a crackdown on stablecoins. In fact I suspect that said crackdown on asset backed coins is the kind of event that may lead to a run on all stablecoins whether asset backed, fractional reserved, algorithmic etc.

The stabilizing mechanism used in Terra seems to be similar to the Iron Finance one. There is a great video explaining why this collapsed resulting in the loss of all the money here BANK RUN in DEFI - Lessons Learned From The Iron Finance Collapse - YouTube. In Iron Finance IRON was like UST and TITAN was like LUNA. It used the theoretical feedback of the price of IRON dropping making it worthwhile to burn for TITAN and vice-a-versa. Sounds like Luna and Terra. When both started dropping it led to a feedback loop that created a death spiral. Iron finance seemed to work fine and then collapsed when it went mainstream. What is different about Terra that I am missing?

About 60% of UST has been minted in the past 15 days, around $4,500,000,000 ($4.5bn) worth. I know this is partially related to funding Ozone, although from what I could read that seems to only around $1m. This is significant printing which makes a large supply of an asset that gains value through delicate balancing of supply and demand. Are there any concerns that utilization of this cash could cause the price to unpeg?

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A global crackdown on centralized stable coins it’s coming and we should be prepared for this. DEFI needs a decentralized stable coin, so adding Terra UST it’s a must. Here are some articles that will help us understand why we need this:

Hey @Alex_BertoG,

Thank you for your reply.

Wormhole V2 Token bridge has processed over 31,000 transactions. There are more in-depth details available here too:
Wormhole stats - Wormhole Token Bridge
Wormhole explorer - https://wormholenetwork.com/en/explorer

It is embarrassing to see the kind of replies in this thread. Everyone in favor of these proposals essentially contributed to the furtherance of a pyramid scheme that defrauded thousands of people with lies and deception.
Within the AAVE community, there has to be a reckoning for all those who furthered the UST/Luna a scam.

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Seems like even entities like Delphi Digital overlooked some of the worrysome points

Although there were delegators like @monet-supply that didn’t do 100% Nod but still

But it opens up as a Learning that we must not forget .

But as long as we have Users that are aware of such situation . They will keep the protocol out of danger …