UST-USDT vampire peg

Exchanges holding LUNA would benefit from replacing USDT with UST, as it would make their LUNA more valuable. The reason why they still use USDT is either that they aren’t familiar with UST/LUNA, or that traders prefer USDT because it’s currently more liquid and adopted.

If 1:1 UST-USDT cross-chain exchange liquidity was available, popular exchanges could switch from USDT to UST without a negative impact on liquidity or interoperability. If traders could swap between UST and USDT 1:1 there would be no downside to using UST over USDT. And to anyone familiar with the Terra eco-system, the upside of switching to UST would be obvious.

So how much would it cost to provide such a cross-chain peg? Would it be worth it if LUNA holders decided to contribute to such a peg? The cheapest stablecoin exchange i’m aware of today is The fee for swapping 1:1 between UST and USDT is 0.04%, and if the swap amount is below a certain level there’s zero price impact/slippage. So far, the construction seems to be working.

Assume LUNA holders would fork Smoothy and remove the 0.04% fee, or collaborate with Smoothy to allow LP’s to forfeit the fee on UST-USDT swaps. There would be little incentive for LPs to do so unless they were confident it would significantly boost the adoption of UST. Some LPs would probably do it but most would not, unless it was incentivised by liquidity mining.

So the hypothetical question boils down to: would it be worth it for LUNA holders to sponsor liquidity mining of a solid UST-USDT 1:1 peg on popular chains?


To expand on this, here’s the business case for an exchange:

Currently, users either don’t earn an interest on USDT deposits, or the interest rate isn’t competitive. By offering pegged-USDT (with UST as underlying), exchanges could provide 20% interest rate on USDT deposits by using UST/Anchor under the hood. They could still provide deposits/withdrawals via USDT, as long as there’s sufficient UST-USDT 1:1 liquidity.

Similar to how Binance and other exchanges offer rebates when using their native tokens for paying fees, there could be a switch for using pegged-USDT instead of native USDT when trading USDT pairs.

Traders could also be presented with an option to simply convert their USDT to pegged-USDT at the time of deposit, and still trade with USDT trading pairs since UST pegged-USDT would trade 1:1 with USDT.

UST has been listed on Smoothy for quite some time now. Imagine integrating this concept with Anchor and lowering the trading fee to 0%. LPs would still earn ~15% on deposits so the opportunity cost without liquidity mining would only be ~5% p.a. Any DEX/CEX could adopt the same model under the hood and significantly lower the friction for traders.