Keep in mind that these topics only provide educational information and are in no way financial advice.
Depegging: The stablecoin kryptonite
Stablecoins are cryptocurrencies designed to maintain price stability and are pegged to an external asset. These assets are viewed as one of the backbones of cryptocurrency and DeFi, but can face the risk of depegging if not properly managed. Depegging refers to the phenomenon of a stablecoin deviating from its intended peg. We saw a hallmark example of a catastrophic depegging with Terra and its algorithmic stablecoin LUNA’s UST. This was a result of a concentrated selling of UST combined with a lack of reserves and liquidity that disabled the issuer from being able to maintain its peg.
USDA, Cardano’s native stablecoin, is fully backed 1:1. The difference between algorithmic stablecoin UST and fiat-backed USDA is that a fully backed stablecoin losing its peg has a much higher probability of returning 1:1 to its paired asset because it’s entirely backed by cash or cash-like reserves. An algorithmic design, which relies on math and code to balance stablecoin issuance against tokenized collateral, may not be as reliable as USDA to regain its peg. Because USDA is fully backed 1:1 to deposits, the USDA stablecoin has been designed to maintain stability, even in the face of market fluctuations. That design is on purpose and is the key to the stablecoin’s stability – the antidote to the kryptonite in this analogy.
USDA’s stablecoin design mitigates risk
A major depegging event could result from a large-scale cash-out where a plurality of USDA holders “rush” to cash out their assets to a different currency (fiat or another asset). The supply and demand dynamics are the same as any other cryptocurrency, thus creating prices higher or less than $1 at any given time. But any depegging on USDA should be temporary, in the event it takes place. The USDA stablecoin is designed to operate by minting or burning USDA coins at a fixed exchange rate of 1 USDA to 1 USD based on user demand, ensuring that each USDA coin is backed by a corresponding US dollar held by our regulated US banking partner.
Fundamentally, all stabilization techniques are based on the elementary economic model of supply and demand. The key to avoiding depegging is understanding how reserves are managed to ensure 1:1 backing. Asset liquidity becomes key here. The pegged USD is custodied by a regulated US banking partner who keeps proper accounting of the cash reserves, making funds available at a moment’s notice. In the event of market volatility causing our stablecoin to depeg below a dollar, EMURGO or any other party would be in a position to purchase USDA on the market and sell it on Anzens, presenting a low-risk arbitrage opportunity. We will provide further information on our reserves in the coming months, including monthly attestation reports – which are reports that are used to provide a snapshot of the reserves and assets that back USDA – and a technical whitepaper.
Mitigating risk as it relates to USDA is critical to not only the health of the Cardano ecosystem but also to its utility in achieving the vision of EMURGO Fintech’s Anzens platform, which includes a suite of Web3 enterprise and individual financial services applications.
There is no one-size-fits-all. But USDA fits most.
It is unlikely that a single design is optimal for all use cases. Which stablecoin is best depends upon a wide variety of competing factors, including intended use, degree of desired trust minimization and decentralization, regulatory jurisdictional compliance, and scalability. The Cardano ecosystem supports a number of stablecoin designs for this very reason.
EMURGO Fintech’s USDA provides Web3 organizations and individuals with a viable option to shelter from market volatility and will usher in more opportunities for real-world use cases. And with the Anzens platform and product suite, USDA will be the stable asset that provides interoperability between traditional finance and decentralized finance.
About USDA, Cardano’s Native Fully Backed Stablecoin
USDA – Cardano’s regulatory-compliant fully backed stablecoin for the ecosystem – is scheduled to launch in early 2023 and bring value to Cardano’s Web3 ecosystem of decentralized applications. USDA will be a native token to the Cardano blockchain. It’s meant to be a stable asset that can unlock fast global transactions without legacy banking and payment infrastructure delays. USDA is the key that will unlock all of the future use cases and applications that will be available on Anzens.
Join the waitlist now at https://www.anzens.com to be ready for USDA.