Here is our pick of the 3 most important stablecoin stories during the week.
How much and what type of Collateral is your stablecoin backed by?
First, It’s not every week that regulators from both sides of the Atlantic ocean come together to discuss cryptocurrencies. But that’s what happened last week, with the European Union and United States counterparts sharing their thoughts on stablecoins, central bank digital currencies (CBDC) and the Markets in Crypto Assets (MiCA) proposal.
At the same time a new type of stablecoin is in the works and after the recent debacle with Terra it’s not surprising that the innovation is overcollateralization.
Curve, an Automated Market Maker (AMM) has reportedly confirmed that a new stablecoin will be overcollateralized at a web3 summit.
It stands to reason that the basic mechanism for a Curve stablecoin would be to mint it against liquidity provider (LP) positions. At a high level, this would be similar to MakerDAO’s collateralized debt position model.
Using LP positions as collateral should theoretically make liquidity more sticky on Curve, as an outstanding loan against an LP position would require users to pay down that loan before retrieving their collateral. After all, people use Maker partially so they don’t have to sell their ETH. In this case, people could borrow against their Curve LP positions so they can access liquidity without giving up that fee-generating collateral.
Another potential advantage of a native stablecoin for Curve would be borrowing fees earned from it. This, too, would be similar to Maker.
Current market conditions have brought fears of assets being subject to liquidation and freezings without the consent of the holders. USDD overcomes these fears from multiple different angles. Whitelisted institutions of the TRON DAO Reserve (TDR) are authorized to mint USDD. The value of USDD is supported by the over-collateralization of highly liquid crypto assets consisting of, but not limited to, BTC, USDT, USDC, and TRX. This allows USDD to be free from centralized intermediaries (such as Banks and Central Banks) so users do not have to worry about their assets being frozen with or without notice. This enables holders of USDD to truly have full ownership of their stablecoin.
Centralized stablecoins such as USDC and USDT are bound by regulators to maintain a 1:1 reserve ratio to the USD. If the centralized authorities of these stablecoins are unable to meet their reserve requirements, this can cause the centralized stablecoins to lose its 1:1 USD peg. USDD is immune to such issues due to its decentralized nature. USDD is not designed to strictly peg to the USD; instead, it floats up and down around it. The price stability of USDD is maintained through monetary policies adopted by the TDR based on market conditions.
Under volatile market conditions, USDD is not considered depegged when it is within 3% up or down from the USD peg. This allows for further flexibility for the TDR to make the necessary monetary policy adjustments if needed. With recent volatility in the markets, USDD has adjusted properly through TDR’s monetary policy tools which have strongly held up against recent concerns. This methodology is known as a Linked Exchange Rate System and has successfully allowed USDD to properly scale.
So in summary, your stablecoin can be overcollateralized, decentralised and stable (relatively). Another innovation for regulators to ponder.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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