5. Tokenomics & Economic Model

5.1. Token Issuance & Redemption

Minting Process:

• Users deposit fiat-backed stablecoins (USDC/USDT) into the Terra Classic-based UST Protocol. One USTD token is minted per dollar deposited, ensuring a strict 1:1 peg with the US Dollar.

Redemption Process:

• USTD tokens can be redeemed at any time for the underlying collateral. This on-chain process guarantees liquidity and the integrity of the peg.

• On/Off Ramp fees: These will be miniscule but are necessary to cover the cost of moving liquidity and prevent/deter possible manipulations.

5.2. Yield Distribution

The USTD protocol employs a dual allocation model to manage the yield generated from the deployed collateral within decentralized liquidity pools.

Dual Allocation Model:

a.) Holder Rewards: Approximately 50% of the yield generated from liquidity pools is distributed directly to USTD holders via periodic on-chain airdrops.

b.) Protocol Reinvestment: The remaining 50% is allocated for strategic protocol functions, including:

• Buyback & Burn Operations: Using yield to repurchase LUNC/USTC on the open market and burn these tokens to reduce supply and support the Terra Classic ecosystem revitalisation.

• Reserve Building (Future Consideration): Potential allocation for acquiring decentralized assets to further enhance collateralization.

While USTD’s design facilitates yield generation, it is important to note that yield returns are entirely subject to market conditions and the underlying smart contract mechanics. There is no fixed or guaranteed yield; rather, returns emerge organically from liquidity dynamics, arbitrage opportunities, and overall market fluctuations. USTD is provided on an “as is” basis, and its primary purpose is to preserve stable value through sound collateralization and decentralized governance.

5.3. $LUNC/$USTC Buyback & Burn Mechanism

Mechanics:

• As we over-collateralise, 25% of the yield accrued will be utilised to allow $LUNC/$USTC to be burned via the market module in exchange for $USTD at a price slightly above market. By performing buybacks slightly above market price it will  incentivise holders/arbitrageurs to burn $LUNC/$USTC which helps deal with the legacy “debt” of the network by providing both deflationary pressure and positive price impact.

Impact on Supply:

• This mechanism provides deflationary pressure over time, ensuring that the token’s value is supported through controlled )

5.4. Incentive Structures & Fee Model

Transaction Fees:

• Minimal fees are applied during minting, redemption, and yield harvesting. These fees help fund ongoing development, security audits, and protocol improvements.

Liquidity Provider Incentives:

• Liquidity providers receive additional incentives through fee-sharing and bonus rewards, aligning their interests with the protocol’s success.

5.5. Maintaining the Peg

• The combination of 1:1 collateral backing, dynamic yield generation, and buyback/burn operations is designed to maintain USTD’s peg to the US Dollar.

• By allowing for 1:1 redemption onchain arbitrageurs are incentivised by profit to maintain any deviation from peg across all the offchain markets. The protocol itself may engage in these arbitrage opportunities to further enhance the profitability of the protocol.

• The use of multiple price Oracles from multiple providers will be used to minimise risks and ensure accurate pricing.