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.