The Terra-Luna Ponzi scheme grew to an incredible size, with the TerraUSD algorithmic stablecoin reaching a mind-boggling $40 billion and the Luna governance token growing to a market capitalization of $40 billion.

This growth was subsidized by Terraform Labs paying an unsustainable lending rate through the Anchor protocol.

Then the music stopped. The value evaporated and the subsequent collapse of Terra-Luna had a devastating effect on the wider crypto ecosystem, destroying trading firms, exchanges, and lending platforms.

However, Terra was far from the sole algorithmic stablecoin, and its spectacular collapse caused a ripple effect that was felt by many of its competitors. Some have pivoted, finding alternative designs with more collateral, but most have failed to see adoption in the industry.

Here we take a look at the current state of some of the better-known projects impacted by Terra’s spectacular demise.

Terra

Terra still exists as ‘TerraClassic,’ and it doesn’t look too dissimilar to how it did before the collapse.

This system has maintained much of the design of the original Terra-Luna system but doesn’t have the subsidized yield of Anchor.

This asset, which has completely failed to maintain its peg, currently trades for less than three cents and is no longer, meaningfully speaking, a stablecoin. It has a market cap of approximately $130 million, a tiny fraction of the nearly $20 billion it once commanded. 

Luna Classic, the corresponding governance token, has a market cap of approximately $500 million, a tiny fraction of the $40 billion it once commanded, according to data from CoinMarketCap.

USDD

USDD is the TRON native algorithmic stablecoin that was announced before the collapse of Terra-Luna. It was intended to duplicate much of Terra-Luna’s model but with an elevated lending rate of approximately 30%. 

USDD was supposed to be integrated into the heart of TRON, analogous to Luna, by November 2022, but this wasn’t achieved by the time Terra failed. This has since been abandoned as one of the project’s goals.

In many senses, USDD has abandoned almost all of the trappings of algorithmic stablecoins and has instead become a stablecoin collateralized by ‘burned’ TRX tokens and a few other assets. A significant amount of its reserves are held at Sun-advised HTX.

Read more: Justin Sun’s USDD removes 12,000 BTC without DAO approval

Nominally, there is a Decentralized Autonomous Organization (DAO) that governs this protocol. However, this appears to be fiction, with actual control over this project being much more centralized.

The governance page shows only a single vote; one that allowed burned TRX to be deployed by USDD, making it unclear if the DAO knows what ‘burning is.’

There are no votes for other major decisions, including the massive changes in protocol directions, the decision to hold reserves at HTX, or the substantial changes in the reserve composition for the stablecoin.

In a recent example, the stablecoin removed 12,000 bitcoins from its reserves without a corresponding vote.

The market cap for the coin has been remarkably stable since its launch, holding around $700 million, according to data from CoinMarketCap.

Celo/Mento

Celo is now a level-2 solution on Ethereum; when it launched, it was a layer-1 that closely mimicked the way in which Terra functions with an algorithmic stablecoin exchangeable for a corresponding governance token. 

This function has since been spun out into Mento, and instead of deriving value from convertibility into Celo Gold, it maintains value by over-collateralization of the Mento Reserve, including assets like CELO, sDAI, USDC, ETH, and BTC. 

The USD-pegged version of these stablecoins has a market capitalization of approximately $26.5 million, down from a peak of almost $120 million, according to data from CoinMarketCap.

Frax

Frax is a dollar-pegged stablecoin that started partially collateralized. However, now on version 3.0, its aim is to be wholly collateralized, principally by cryptocurrencies. 

Currently, the collateral for this coin is largely staked and directly held FRAX. 

The market capitalization for this token is approximately $640 million, down from a peak of approximately $2.9 billion, according to data from CoinMarketCap.

Read more: How to submit a Terra Luna or Anchor loss claim

Conclusion

Many projects that once hoped to emulate Terra’s incredible success have had to pivot as the consequences of its failure reverberated throughout the ecosystem.

Very few of these projects have seen new adoption since Terra’s failure, and more attention seems to be spent on alternative stablecoin designs like Ethena’s eUSD.

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USDD, the algorithmic stablecoin on Tron supposedly governed by the TRON DAO Reserve, has removed approximately 12,000 bitcoins from its collateral, despite the DAO not approving the change.

The coin was originally planned to be a Terra rip-off promoted by Justin Sun, however, ambitions to integrate it into the core of TRON were abandoned following the ignominious failure of Terra-Luna.

Previously, the USDD transparency page included approximately 12,000 BTC in 1KVpuCfhftkzJ67ZUegaMuaYey7qni7pPj; however, that address is no longer included. 

Despite Sun and USDD’s frequent claims that it is governed by a decentralized autonomous organization (DAO), there are no governance votes that seem to correspond to this change. 

There has actually only been one vote in the entire history of the DAO, back in May 2023, when a vote was held to allow USDD to use ‘burned’ TRX for the stablecoin. This suggests that neither Sun or USDD understand what ‘burned’ means. 

USDD has had other issues surrounding its collateral, including storing a significant quantity at HTX, despite not consulting with the so-called DAO.

Read more: How involved is Justin Sun with WBTC’s new custodian BiT Global?

USDD has a total supply of approximately $744 million, making it larger than TrueUSD, Tether Gold, and the inspiration for the system, Terra Classic. 

The ‘Peg Stability Module’ for the token, which enables users to easily swap it for other stablecoins, is nearly drained, holding $19 million USDT, 0 USDC, 0 TUSD, and 0 UDSJ.

Protos has reached out to USDD for comment on these issues but has not received a response at time of publication. 

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USDD is a massive stablecoin that describes itself as ‘algorithmic’ and has a market capitalization of approximately $730 million. However, despite this size and seeming importance, it has a variety of issues, from its design to its reserves and its partners.

Changes to USDD

When USDD was launched, it was intended to inherit an algorithmic design reminiscent of the Luna-Terra system. The original whitepaper described how, by the end of 2022, Tron version 5.0 was going to be released, which would integrate USDD minting and redemption directly into the core of the protocol. However, as of press Tron version 5.0 has yet to be released. 

This version was meant to actually ‘burn’ the tron (TRX) used to issue new USDD; currently, the TRX that is ‘burned’ isn’t burned but instead held in a wallet and counted as collateral for the token.

Following the collapse of the Luna-Terra system, more recent whitepapers for USDD no longer mention being integrated into the core of Tron in this way. Additionally, USDD currently has no documented mechanism to redeem USDD.

Protos has reached out to Tron Network and USDD to see when version 5.0 will be released and whether or not it will integrate USDD in the manner described in the original USDD whitepaper. 

Is it even a DAO?

USDD is managed by the Tron DAO Reserve (TDR), which you would assume is a decentralized autonomous organization (DAO), but unfortunately, it doesn’t meaningfully fulfill that role. 

The governance page shows only a single proposal in the entire history of this protocol. This proposal allowed for the TDR to use the ‘burned’ TRX, despite that appearing to be inconsistent with what the word ‘burned’ means. 

There are no proposals that describe how the reserves are held, no proposals that explain why the direction of the protocol has changed, and no proposals that explain why certain partners have been added or removed for TDR. 

Does HTX have the funds it is supposed to?

USDD lists TZ1SsapyhKNWaVLca6P2qgVzkHTdk6nkXa as one of the addresses that hold the collateral for USDD. This address holds approximately 972 million TRX, worth approximately $120 million. It is also important to note that almost all of these tokens are staked. These funds, which are nominally managed by TDR, are also included in the HTX proof-of-reserves, which suggests that they’re currently held at HTX. 

There are no governance proposals that explain why these funds are being held in this way. Protos reached out to HTX and TDR but they didn’t provide clarification on why these funds are held in this way. HTX did claim that “the platform has never had any security incidents in the past 10 years,” despite this not being true. When asked for clarification about the previously disclosed security incidents, HTX reiterated that no security incidents had occurred. 

Issues with partners

USDD relies on the partners in the TDR to manage issuance of the token, a role that has become more important as USDD has seemingly abandoned its goal of integrating issuance directly into the core of Tron.

Alameda Research, the now-bankrupt trading firm that was embezzling billions of dollars worth of customer funds from FTX and was owned by financial criminal Sam Bankman-Fried, was just one of the partners for this product who have experienced significant issues. 

Justin Sun, an ‘advisor’ to HTX and a frequent promoter of USDD, owns Poloniex, an exchange that is one of the other partners. Poloniex has yet to finish a promised proof-of-reserves and has refused to disclose the reserves for its WBTC on Tron product, a significant portion of the ‘bitcoin’ on HTX.

Read more: Justin Sun’s empire crumbles as USDD depegs again

Multichain was a bridge before it was hacked, its chief exec was arrested, and the remainder of the team has lost access to the web presence and most of the other materials. Despite these issues, it’s still listed on the USDD website.

TPS Capital (also known as Tai Ping Shan) is listed as a partner, despite its website no longer being available. TPS Capital was an over-the-counter (OTC) trading desk that was deeply connected to Three Arrows Capital. 

FalconX is listed as a partner and also recently settled with the Commodity Futures Trading Commission over charges of failure to register as a futures commission merchant. 

Other partners include Mirana Ventures, Amber Group, and Ankr. 

Protos has reached out to all of the current partners except for TPS Capital and Multichain to determine if they are concerned about collateral for USDD being stored at HTX and whether or not they participated in any type of governance process to choose to store the assets there. At time of publication, none of them have responded.

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For the fifth time in its brief existence, Justin Sun’s decentralized stablecoin USDD has depegged. The coin, which is supposed to stay priced at a dollar via a series of algorithmic mechanisms, has deviated 3% from its $1 peg, currently trading for $0.97.

The depegging comes on the back of news that another Justin Sun-based entity, Poloniex, is struggling to maintain a peg for its wrapped bitcoin (WBTC) product. Sun’s other stablecoin, TUSD, has also seen its peg break, though only slightly compared to the issues that the WBTC on Poloniex or USDD are having.

It’s worth noting that all of Justin Sun’s projects have been struggling as of late. HTX, the Sun-advised crypto exchange, hasn’t only seen customers complain of being ripped off but has been involved in lies from Justin Sun about his personal bitcoin stash. The HTX token, which was rebalanced and altered without customer approval, has seen its value fall almost 25% in only a few months.

Read more: Justin Sun directed wash trading scheme from his US apartment, SEC claims

More problems for crypto whiz kid Justin Sun

The enigmatic crypto billionaire has been at the center of numerous controversies over the years, from claims that he’s guilty of market manipulation and wash trading to less concerning problems like his inability to take advantage of his $28 million trip to space (because he can’t or doesn’t want to come back to the United States).

Sun, who once was the ambassador to the WTO for Grenada and has numerous citizenships (including to St. Kitts and Nevis, Malta, and the People’s Republic of China), has seen his fortunes suffer a bit of a reverse since last year when he started to get involved with Huobi (now HTX).

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HTX, formerly Huobi, offers a ‘proof-of-reserves’ process meant to help assure users that it has the assets they need to be a solvent exchange. At one point, it even claimed that a third party would verify the proof-of-reserves process before eventually admitting, “After the release of the relevant announcement, we have connected with a third party, but then no third party can do this. So there are no third parties.”

Unfortunately, and perhaps contributing to the lack of third parties, it appears that HTX has been including ‘collateral’ for the USDD algorithmic stablecoin in its reports.

HTX provides a software tool that intends to make it possible for third parties to verify that HTX has the assets it’s supposed to. The ‘snapshot’ was most recently updated for the beginning of December and included the Tron address, TZ1SsapyhKNWaVLca6P2qgVzkHTdk6nkXa. 

This address is also listed as one of the “reserve accounts managed by the TRON DAO Reserve” for the USDD algorithmic stablecoin. This suggests that the assets in this address are being simultaneously counted as assets for HTX and collateral for USDD.

Further complicating this discussion is the claim that this account is “managed by the TRON DAO Reserve.” As we review the governance module for USDD, we can see only a single proposal that has ever been voted on, which doesn’t seem to provide for the collateral controlled by this DAO to be deposited at HTX.

stUSDT 

Other problems in the Sun ecosystem manifest in the HTX proof-of-reserves, including the incredible quantity of stUSDT (staked tethers) it controls. 

The vast majority of this Sun-controlled project ends up at HTX, with the remainder ending up in other addresses believed to be controlled by Sun. Furthermore, this raises additional concerns because approximately $402 million in stUSDT is included in the total balance of $475 million USDT on the platform, suggesting nearly 85% of all tethers on the platform are in this product.

The HTX Proof-of-Reserves suggests HTX holds approximately $475 million in assets against $470 million in user assets.

WBTC

Another problem in the HTX Proof-of-Reserves is the presence of WBTC on Tron in the proof-of-reserves. This product is offered by Sun-owned Poloniex; however, Poloniex previously told Protos it couldn’t disclose the Bitcoin addresses that hold the collateral for this token to us.

Nearly 45% of all Bitcoin on HTX is in this ‘wrapped’ form. Protos is unable to verify the backing. Currently, the proof-of-reserves suggests that HTX holds 21,842 BTC against 21,820 in user assets.

Read more: HTX hacked week after Poloniex — now Justin Sun only posts as AI

These various Sun-connected products make up a significant portion of HTX’s reserves but raise serious questions about the quality and quantity of assets held at this exchange. These concerns are only heightened following a recent hack.

Protos has reached out to HTX to clarify why these assets are included in the proof-of-reserves.

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Both of Justin Sun’s stablecoins, one of which Protos has previously reported on, are struggling to maintain their promised $1.00 peg.

At the time of writing, USDD is hovering around $0.97, and USDJ is trading at $1.09. Curiously, this means that one of Sun’s stablecoins is melting down while the other is melting up.

How the stablecoins work

USDD relies on a Decentralized Autonomous Organization called the TRON DAO Reserve to stabilize the price of the stablecoin. Since November 8, it’s been unable to reliably peg the price to $1 and has consistently traded at a 2% discount, suggesting the mechanism has ultimately failed.

Meanwhile, USDJ, a stablecoin that started in 2020 to support the JUST Network — a Justin Sun-crafted DeFi project, relies on “collateralized debt positions” and “autonomous feedback mechanisms.” It too has begun to fail.

Thin markets and big swings

The combined daily volume for the two coins is less than $50 million a day — often far less — but both currencies have almost identical market cap structures. Within about a month, USDD reached its market cap plateau of about $700 million.

USDJ remained nearly untouched for about a year before seeing its market cap spike from a mere $15 million to almost $300 million.

These coins only trade on a few exchanges, including Poloniex (owned by Justin Sun), Huobi (owned by a Justin Sun shell company), and Sun dot io (a decentralized exchange named after Justin Sun).

This means that few people besides Sun are incentivized to utilize the dual stablecoins. In addition to this, Huobi, one of the only exchanges they’re trading on, is experiencing insolvency rumors and staff layoffs, meaning they could be experiencing a liquidity crisis, as well.

Read more: Justin Sun, crypto’s most shameless marketer, play-acts the hero

Where’s Justin’s money?

While layoffs at Huobi and suggestions of an FBI investigation into Sun point to money and legal issues for the TRON founder, many questions remain unanswerable. That is at least until the problems with his exchanges and stablecoins play out.

The coins themselves are curious insofar as they’re behaving in differing ways, with no recent capital injections to attempt to control the instability at hand and no incentive for short-sellers to try to short the broken stablecoins. Clearly, where the problems are coming from — or how they could be solved — isn’t Sun’s number one priority.

On Sunday, Sun put out a tweet thread in Chinese apologizing for Huobi’s poor communication during times of strain and welcomed further criticism of the exchange. He also expressed a desire to expand his business endeavors into China.

At the same time, it’s unclear how serious His Excellency is taking his ambassadorship to the WTO for the country of Grenada. His last tweet regarding his position was in October of 2022 and his last video was in June.

All of this is a far cry from Q3 and Q4 of last year when Sun was promising “safe and sustainable” 148% interest rates on stablecoins and saying he’d invest “at least billions” in an attempt to save FTX.

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Crypto exchange FTX, trading firm Alameda Research, and news of the hundreds of other companies exposed to their collapse has kept the spotlight off a few floundering projects. Take, for instance, Justin Sun’s personal “algorithmic” stablecoin USDD.

FTX withdrawals stopped functioning on November 6 and 7. Two days later, something broke for USDD. Price briefly spiked to $1.01 on November 9 and then began to drop. USDD slipped from its $1 peg, falling to as low as $0.97. The stablecoin last maintained its promised peg on November 14 — exactly one month ago. So what’s the problem?

It turns out Sun’s algorithmic stablecoin is neither algorithmic nor a stablecoin. The updated whitepaper now includes some ability to exchange USDD for other stablecoins like tether (USDT) and USD coin (USDC). However, it also promises that the Tron DAO Reserve has a mechanism to ensure the asset stays pegged to the dollar. Clearly, that mechanism has failed.

It’s worth noting that the Tron DAO Reserve is currently offering “risk-free” yields of nearly 50% on staking — a stunning and concerning figure.

Read more: The crypto bromance of Binance’s CZ and Tron’s Justin Sun

Earlier this year, Sam Bankman-Fried tried to distance himself and his firm Alameda Research from USDD trading. Only, the coin was listed on multiple FTX trading platforms. It’s possible that Alameda acted as a market maker for USDD on FTX.

Even with a massive uptick in volume last week and no real way (or incentive) to short the 57th largest cryptocurrency, USDD is still unable to claw its way back to a peg — suggesting the issue lies outside the scope of short-sellers or market manipulation.

The largest market for USDD is on crypto exchange Huobi, which is rumored to have been purchased by Sun through an investment vehicle, About Capital Management, in October of this year. Its manager Ted Chen has assumed a board seat at Huobi, along with Sun. Interestingly, Huobi board member Leah Wald is the chief exec of Valkyrie Investments — another fund invested in by Sun.

It appears that the real interest in Justin Sun’s stablecoin is Sun himself. Can this somehow save his flailing “algorithmic stablecoin”?

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