The Differences Between UST on Terra And DUSD on DeFiChain

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After the recent turbulence surrounding the Luna ecosystem, we would like to have a closer look into what has happened there and explain the differences between the DeFiChain ecosystem and its different approach when it comes to the utility of the DeFiChain stablecoin DUSD.

What has happened to the Luna ecosystem

Over the last couple of days, Luna, one of the leading EVM blockchains, experienced a sharp decrease in the $LUNA price. As a result, its algorithmically pegged stablecoin called $UST lost its peg to the US dollar. Let us quickly have a look at what exactly has happened there:

$UST stabilizes its peg by allowing anyone to redeem 1 $UST for $1 worth of $LUNA or 1 $LUNA for its equivalent value in $UST. To incentivise arbitrageurs, $UST must possess true utility. The main utility in the Luna ecosystem is derived from the Anchor protocol, which guarantees a 19.5% yield and is currently responsible for more than 50% of $UST’s circulating supply. However, Anchor’s dominance over $UST is also an issue, as it has lost more than half of its total TVL this week. If $UST leaves Anchor and is swapped for other assets, then this creates sell pressure on $UST.

Unfortunately this is a major issue for $LUNA, because whenever $UST is minted, the equivalent dollar value of $LUNA is burnt. This is great for $LUNA as it reduces the total supply. But it also works the other way: Whenever $UST supply reduces, $LUNA is minted. If more $LUNA is minted, then this increases the total supply, resulting in more tokens entering the market and driving down the price of $LUNA. This is exactly how the death spiral started in the last 24 hours and kicked off  a whole cascade of events including FUD and people panicking out.

Why DUSD and the DeFiChain ecosystem work differently

The DeFiChain ecosystem and here in particular $DUSD has by design much broader utility applications, and thus real value. But before we jump into that, we should have a look into how value is created –– value is a function of three variables: value = “utility” x “scarcity” x “the number of people using it”.

So when utility drops, the value drops. We have already learned that $UST only had one single utility – its promise to yield you 19.5% in APR. DUSD on DeFiChain on the other hand has three distinctive utility applications:

  • The first one is similar to the Luna ecosystem and revolves around the possibility to generate APRs.
  • The second use case is that all dTokens are traded against DUSD and
  • The third application is that DUSD can be used as collateral for setting up Vaults.

When it comes to scarcity, then there is also a clear distinction between the $LUNA and the DeFiChain ecosystem. There is simply no way how you can create DFI with DUSD. This is a design feature and was implemented on purpose, preventing a hypothetical scenario where the stablecoin is dragging down the price of $DFI. Even in times where dTokens decreased by high percentages, the inherent DUSD mechanism reduces the DUSD supply and increases the scarcity.

Summary

The engineers in DeFiChain put utmost importance into designing a thought-through system, built on solid game theory principles. Thus, the wider DeFiChain community should not be worried about any similar occurrences that happened in the Luna ecosystem. The DeFiChain system by design is resilient enough to withstand similar events. In case you have any questions, please feel free to ask them on our social media channels, first and foremost Twitter.