Everything you need to know about stablecoins: Part II

3-Key element for an efficient algorithmic StableCoins infrastructure :

• Governance :

Algorithmic stablecoins can feature a (decentralized autonomous organization) DAO-like structure as the governance of the system. A functioning smart contract-based governance model is a good choice in ensuring the proper management of proposals.

However, the stakeholders or participants need to have a fair offering to ensure the proper distribution of the token.

• Incentives :

Offering incentives to the users for modifying their tokens is a key element in algorithmic stablecoins.

Many of the stablecoin platforms tend to use incentives to encourage their users to take part in maintaining the stability of the currency.

• Token Adoption :

Typically, major projects are adopted by only a small number of users or developers on the market.

Automated Market Makers don’t need approval; therefore, they are excluded from adoption, it affects negatively because of limitations for new users.

• Accuracy :

Protocols may malfunction and fall in a “death loop”. There needs to be another protocol that will ensure that even if a protocol falls in a loop, this new protocol will help it to move out of the loop.

4-Risks of algorithmic StableCoins:

The most critical factor in an explanation for non-collateralized stablecoins would point out the risks associated with them. In order to understand the different risks associated with algorithm stablecoin protocols, let us take the example of Basis, an uncollateralized stablecoin. Here are some of the notable entries among risks you can find with algorithm-based stablecoins.

• Increase in supply

Weren’t the best algorithmic stablecoins tailored for balancing the supply of stablecoin? How does it pose risks to token holders? When the price of the token increases above the predefined stable value, the algorithm mints new tokens for increasing supply. In the case of Basis, you can find Share tokens according to which the holders of shares receive newly minted stablecoins in event of increased supply.

On the other hand, the shares could get new tokens only after payments to the bondholders. Payment of newly minted tokens infuses value in the shares, albeit depending considerably on increasing demand. In event of a slowdown in demand growth, new stablecoins must be minted, thereby leading to loss of value of shares.

• Reducing Supply

The reduction in supply also presents another notable addition to the risks of algorithmic stablecoins. One of the common approaches for reducing supply with algorithm-based stablecoins is the facility of ‘bonds.’ Such bonds are on sale in an open market for a lesser value than the predefined stable value. Payment for the bonds is carried out by using stablecoin with a promise of returning one stablecoin in the future. However, buyers need to invest their confidence in the fact that the bonds will payout at a specific point in time.

• Oracles

Another top addition among the risks of algorithmic stablecoins refers to oracles. Oracle contracts are responsible for offering the price data related to the concerned stablecoin. Subsequently, the algorithm ensures adjustments in the supply with knowledge of the price. However, the selection and implementation of oracles can present formidable challenges, especially considering the aspects of trust, honesty, and accuracy.

• Broken Pegs

The final entry among the challenges associated with non-collateralized stablecoins refers to broken pegs. Peg breaks are considerably worst scenarios for any type of stablecoin, and uncollateralized stablecoins run the maximum levels of risk. Why? They depend considerably on market confidence. Without market confidence, a token or coin could gradually fade away into oblivion. If any stablecoin encounters two prominent peg breaks, then they would encounter prominent difficulties in recovering effectively.

Example of an Algo StableCoin:

• FRAX

FRAX follows the assumption that a stablecoin could be secure as well as partially collateralized, with a system relying on arbitrage. Collateralization of FRAX with USDC at a ratio that keeps the total USDC backing at a lower level than the total supply of FRAX.

Apart from its under-collateralized nature, FRAX also leverages USDC in place of ETH. Another crucial highlight about FRAX as one of the top additions in an algorithmic stablecoins list refers to its governance. FRAX follows a governance-minimized approach to enable considerably lesser algorithmic dials for the community to modify.

What is LUNA and UST?

Luna (LUNA) and TerraUSD (UST) are two native tokens of the Terra network, a blockchain-based project developed by Terra Labs in South Korea.

WHAT IS LUNA AND HOW DOES IT WORK

According to Terra’s white paper, the founders’ goal was to fulfill what Bitcoin originally set out to be: a peer-to-peer electronic cash system. To achieve that, Terra deploys a system of stablecoins — cryptocurrencies whose value is pegged to different assets such as commodities or fiat.

UST is by far the most popular among them and tracks the price of US dollars whereby one UST token hovers closely around the $1 mark. It achieves its peg to the dollar through the use of the ecosystem’s other token, LUNA.

LUNA plays a vital role in maintaining the price of the Terra stablecoins and reduces market volatility so they remain stable

The price of the LUNA token has experienced an astronomical rise in price over the last year. In 2021, LUNA traded at $0.66 and closed the year at $89. Subsequently, it hit its all-time high of $104.58 on March 9, 2022, at a time when most other cryptocurrencies were falling in tandem with global capital markets catalyzed by the Ukrainian invasion crisis.

From relative obscurity, UST has emerged to become the fourth-largest stablecoin behind tether (USDT), USD coin (USDC) and Binance USD (BUSD), surpassing $15 billion in market capitalization.

WHAT IS UST AND HOW DOES IT WORK

Stablecoins are a specific type of cryptocurrency whose price is pegged, usually to a state-issued fiat currency such as the U.S. dollar. What makes stablecoins in the Terra blockchain different is the method they use to keep the price stable.

Instead of relying on a reserve of assets to maintain their peg, as USDC and USDT do, Terra assets represent algorithmically stabilized coins. This involves using a smart contract-based algorithm to keep the price of UST anchored to $1 by burning (permanently destroying) LUNA tokens in order to mint (create) new UST tokens.

So, how does it actually work?

It all has to do with arbitrage. This usually refers to the process of making small profits by finding discrepancies between asset prices on different exchanges. However, in the case of LUNA and UST, it works slightly differently.

In the Terra ecosystem, users can always swap the LUNA token for UST, and vice versa, at a guaranteed price of $1 — regardless of the market price of either token at the time. This is important to note because it means if demand for UST rises and its price rises above $1, LUNA holders can bank a risk-free profit by swapping $1 of LUNA to create one UST token (which due to a rise in demand in this example, is worth more than $1).

During the swapping process, a percentage of LUNA is burned (permanently removed from circulation) and the remainder is deposited into a community treasury. Funds in the treasury are then used to invest in applications and services that expand the utility of the Terra ecosystem.

Burning a percentage of LUNA tokens reduces the number of overall tokens left in circulation, making them more scarce and, therefore, more valuable. By minting more UST tokens, it has the effect of diluting the existing tokens in circulation and bringing the overall price back down to its $1 level.

Similarly, if demand is low for UST and the price falls below $1, UST holders can exchange their UST tokens at a ratio of 1:1 for LUNA — which is worth more because of their scarcity and so the user can bank another risk-free profit.

What is Anchor ?

Anchor is a decentralized savings protocol offering low-volatile yields on Terra stablecoin deposits. The Anchor rate is powered by a diversified stream of staking rewards from major proof-of-stake blockchains, and therefore can be expected to be much more stable than money market interest rates.

The Anchor community believes that a stable, reliable source of yield in Anchor has the opportunity to become the reference interest rate in crypto.

The Anchor protocol defines a money market between a lender, looking to earn stable yields on their stablecoins, and a borrower, looking to borrow stablecoins on stackable assets. To borrow stablecoins, the borrower locks up Bonded Assets (bAssets) as collateral, and borrows stablecoins below the protocol-defined borrowing ratio. The diversified stream of staking rewards accruing to the global pool of collateral then gets converted to stablecoin, and then conferred to the lender in the form of a stable yield.

Deposited stablecoins are represented by Anchor Terra (aTerra). aTerra tokens are redeemable for the initial deposit along with accrued interest, allowing interest collection to be done just by holding on to them. Anchor is structured to provide depositors with:

>High, stable deposit yields powered by rewards of bAsset collaterals >Instant withdrawals through pooled lending of stablecoin deposits >Principal protection via liquidation of loans in risk of under collateralization Anchor is an open, permission-less savings protocol, meaning that any third-party application is free to connect and earn interest without restrictions.

TRON to lunch a native stablecoin called USDD.

Justin Sun from the Tron network has revealed a new stablecoin issued on top of the blockchain Tron.

Tron’s USDD launch follows the exponential climb of a few decentralized stablecoins.it offers an over-collateralization method in order to keep its dollar peg. In more recent times, Terra’s UST has surpassed DAI’s market valuation and it also offers an algorithmic reserve method in order to keep its dollar peg. Terra’s UST is now the third-largest stablecoin project, as it commands a $17.89 billion market capitalization.

In fact, USDD operates an awful lot like Terra’s UST and Sun explained on Thursday it will be backed by $10 billion in crypto reserves to start. “In the Stablecoin 3.0 era, USDD will not rely on any centralized institutions for redemption, management, and storage,” “In the Stablecoin 3.0 era, USDD will not rely on any centralized institutions for redemption, management, and storage. Instead, it will achieve full on-chain decentralization.”

USN:

A decentralized stablecoin called USN has launched today on Near Protocol. USN is a decentralized stablecoin similar to TerraUSD (UST) and Frax Finance (FRAX), which are soft-pegged to the US dollar but don’t hold dollar cash reserves. The USN stablecoin can be minted by depositing in NEAR tokens — the native crypto asset of the Near blockchain — as collateral.

An independent team called Decentral Bank — organized as a DAO — is leading the USN stablecoin effort. It is working in collaboration with Proximity Labs, which is a contributor to the DAO.

A Proximity spokesperson said USN can serve as an effective way to bootstrap liquidity for DeFi protocols.

The USN stablecoin will pay roughly 10% annual yield from Decentral Bank. This minimum yield will come from Decentral DAO’s revenue from native staking of NEAR tokens with security validators. This staking process currently earns just about 11% return, the team said in a Twitter post.

Per the DAO, the USN yield will vary depending on the NEAR staking percentage and the market value of the tokens, and in the beginning could likely add up to more than 20% APY for “first lenders” through additional incentives. Notably, the USN yield will kick start only after a DAO vote.

In addition, the Decentral Bank DAO will have a few stability mechanisms to support USN’s dollar peg. The first is an arbitrage system that will try to ensure that the USN stablecoin trades around one dollar worth of NEAR tokens. The second is a “reserve fund” made of NEAR and USDT tokens owned by the DAO treasury. How much will be spent on this fund is still undecided.