Comparison between Usual Protocol and LUNA
Here are some key differences in design between Usual Protocol and LUNA that determine Usual Protocol's potential in stability and risk management:
(1) Differences in Stablecoin Mechanisms
LUNA: Uses algorithmic stablecoins, which maintain the price of the stablecoin through the exchange relationship between LUNA tokens and UST in the market. However, this design relies on market sentiment, and when the market loses confidence, the stablecoin may de-peg, leading to ecosystem collapse.
Usual Protocol: Utilizes a collateral-based stablecoin (USD0). Users need to provide eligible collateral (such as crypto assets or real-world assets) to mint USD0. This means that the stability of USD0 relies on the value of the collateral rather than the price fluctuations of tokens in the market.
Risk Management: Usual Protocol introduces an 'anti-bank run mechanism' that allows the system to take measures to protect the stability of the protocol in the event of large-scale redemption demands (such as possibly limiting redemptions or selling collateral on the market). This collateral-backed stablecoin mechanism is more secure than LUNA's algorithmic mechanism.
(2) Differences in Governance Mechanisms
LUNA: The governance mechanism of Terra has centralization issues, with a large amount of voting power concentrated in the hands of a few large holders or development teams, leading to decisions overly reliant on the judgment of a few, which also exacerbates risks.
Usual Protocol: Although the USUAL token also provides governance functions, its distribution mechanism and decentralized governance design allow users to have a greater say in protocol decisions. Although decentralized governance also carries certain risks, it tends to be more decentralized compared to LUNA, which can avoid control by a single party.
(3) Market Sentiment and Risk Response
LUNA: The Terra project failed to effectively manage market sentiment and lacked timely crisis response mechanisms, resulting in widespread panic among investors and a systemic collapse.
Usual Protocol: Usual Protocol provides strict collateral management and an anti-bank run mechanism, enabling the protocol to remain stable during extreme market fluctuations. This is a significant advantage of the protocol compared to LUNA, indicating its greater potential to cope with extreme market conditions.
(4) Access to Real-World Assets
LUNA: The stablecoin UST of Terra has no actual asset backing but relies on market supply and demand to maintain its value.
Usual Protocol: The design of the USD0 stablecoin also involves the access to real-world assets (RWAs), which may reduce the impact of market volatility on the protocol by providing crypto users with access to traditional assets. If Usual Protocol can successfully access high-value, low-volatility real-world assets, it can provide more stable support for the protocol.
3. Possible Risks
Although Usual Protocol has many design features superior to LUNA, there are still some potential risks:
Liquidity Risk of Collateral: Usual Protocol relies on collateral to maintain the value of the USD0 stablecoin. If the market value of the collateral fluctuates significantly (especially in the case of large-scale redemptions), it may lead to liquidity issues for the protocol.
Impact of Market Sentiment: Despite the anti-bank run mechanism, extreme market fluctuations can still affect the stability of the protocol, especially during market panic.
Risks of Decentralized Governance: Although Usual Protocol has designed a decentralized governance mechanism, the efficiency and fairness of governance still need to be tested. If the distribution of token holders is uneven, it may lead to centralized governance, which in turn affects the stability of the protocol.
4. Summary
Usual Protocol has multiple advantages compared to LUNA, especially in terms of stablecoin mechanisms (collateral-based) and risk management. The USD0 stablecoin is based on asset collateral and an anti-bank run mechanism, allowing it to maintain stability better during market fluctuations. The USUAL governance token also features a decentralized governance mechanism that incentivizes user participation and prevents governance centralization.
However, no decentralized protocol can completely avoid risks, particularly under the influence of collateral liquidity and market sentiment, where there still exists some uncertainty. Therefore, although Usual Protocol has stronger design safeguards than LUNA, continuous attention is still needed regarding its technical implementation, market acceptance, and the effectiveness of its governance mechanism.
