Before discussing the various stablecoin varieties, let’s first clarify what a stablecoin is; Cryptocurrencies known as stablecoins have their value pegged to another currency, commodity, or financial instrument. The extreme volatility of the most widely used cryptocurrencies, such as Bitcoin (BTC), has rendered such investments less suited for widespread usage in transactions. Stablecoins aims to offer an alternative to this situation.
Blockchain- and prediction-market-based loans are hampered by the volatility of cryptocurrencies. Other long-term smart contracts that require stability can potentially encounter difficulties due to volatility. Furthermore, it is obvious that there are users who want to store and use their money in an asset that serves as a store of value.
There have long been discussions about the possibility of developing cryptocurrencies with stable prices. Stabilizing prices has proven to be the biggest obstacle. Because of this, many people view the development of stablecoins as the zenith of crypto.
There are various types of stablecoins:
- Fiat/asset-collateralized; These coins frequently have a 1:1 real-world asset backing, such as US dollars, gold, or oil. They are typically fairly centralized because the collateral must be kept in a secure location, like a bank account. Users of such a system must have faith in the collateralizing party.
- Simple logic/low hacking risk (no code involved)
- Price stability
- Requires expansive audits
- Require reliance on a third party
- Crypto-backed Stablecoins; Cryptographic assets could be used as collateral if we want to avoid relying on the conventional payment system. Since this is cryptoland, why go back to these outdated banks with their flimsy state-backed currencies? In this instance, the crypto asset ensures stability. These ventures typically use many currencies to spread risk and have excessive collateral to account for market volatility. The ratio of the collateral may be as high as 1:2. However, the stablecoin will be lost if the collateral falls to zero. The over-collateralization required by this strategy, which locks up a significant quantity of cryptocurrency assets, removes the need to rely on a third party, but it is economically inefficient.
It involves trustworthy digital currencies like Bitcoin or Ethereum. Stablecoins with crypto-collateral are decentralized, and Dai is the most well-known. Built on the Ethereum network, Dai is pegged to the US dollar.
- Transparency/no audit needed
- Can be inexpensively liquidated
- Less centralized
- Complex in design
- inefficient use of capital (over-collateralization)
- Non-Collateralized stablecoins; Stablecoins of this type don’t hold any sort of collateral. They rely on smart contracts to adjust the supply of stablecoins in accordance with market demand in order to maintain the value stability.
- No collateral needed
- A crash is very likely (under some scale)
- Very complex
The Stablecoin Ecosystem
Let’s examine the market for stablecoins, starting with the simplest solution: stablecoins backed by fiat or other real-world assets.
- The most well-known project is Tether(USDT). With coin backing from the USD, Tether is a completely centralized solution.
- Circle’s USDC. The Centre consortium, which is behind this asset, says USDC is issued by regulated financial institutions.
- Dai; Dai is a form of collateral-backed currency whose value is fixed to the US dollar and maintained constant through a system of matching financial incentives.
The Dai token resides on the Ethereum blockchain, and neither its solvency nor its stability are dependent on any trusted third parties. All Dai that are in circulation are created from Maker Vaults and are supported by an abundance of collateral assets.
Using Dai is similar to using any other cryptocurrency: It is possible to hold it as a safeguard against market instability, send it freely to others, and use it as payment for products and services.
How Does Dai Work?
Dai is created when users borrow against locked collateral, and it is destroyed when loans are repaid. If you deposit Ether or other cryptocurrencies accepted as collateral, you will create a new Dai. When you pay back the borrowed Dai, the locked collateral will be recovered. The self-enforcing smart contracts provided by Ethereum keep a public record of every transaction made on the blockchain. As a result, Dai’s system is open and less likely to be corrupted. Additionally, Dai has a democratic system of government in which the votes of regular participants are used to make all changes and decisions.
Can $CMST serve as the Cosmos Native Chain’s DAI?
In a nutshell, Cosmos describes itself as a project that addresses some of the “hardest problems” that the blockchain sector is now grappling with. By providing an ecosystem of interconnected blockchains, it seeks to provide an alternative to “slow, expensive, unscalable, and ecologically harmful” proof-of-work methods like those employed by Bitcoin.
Using a modular framework that demystifies decentralized apps, the project also aims to simplify blockchain technology for developers. Last but not least, an inter-blockchain communication protocol facilitates communication between blockchain networks, reducing industrial fragmentation.
Recent months have seen a lot of interest in $CMST, a new stablecoin created to support the Cosmos Ecosystem.
Composite ($CMST); Composite is made to support the Cosmos ecosystem and to have a steady value of $1 per unit of currency. The Composite stablecoin is being created to provide liquidity to Cosmos assets and power DeFi on Cosmos. It is completely collateralized and IBC-enabled. The MakerDAO DAI stablecoin, which is the top decentralized USD-backed token, served as the model for the stablecoin.
How will $CMST maintain its Peg
This part from the earlier-published blog by Composite should be helpful.
As with fiat money, the decentralized money supply is ultimately governed by monetary policies, the primary protocol tool for long-term peg maintenance. However, the short-term pegging of $CMST will primarily be driven by an arbitrage-based pegging mechanism outlined below:
If $CMST > $1: Users can mint $CMST for $1 by locking up collaterals and selling the minted $CMST for a price >$1
Protocol lowers borrow interest APR as well as savings APR to ensure minted $CMST adds supply to markets
Backstop: Protocol utilizes surplus $CMST to buy and burn $HARBOR
If $CMST < $1: Users can buy $CMST at a price <$1 to unlock collaterals and pay back their debt cheaply.
Protocol increases borrow interest APR as well as savings APR to ensure $CMST supply in markets reduces
Backstop: Protocol mints and sells $HARBOR to buy $CMST
As all minted $CMST exists as a debt against locked collateral assets and thus accrues a variable interest APR (stability fee), which serves as a primary monetary policy tool for the protocol to control $CMST issuance. A protocol savings pool allows users to deposit minted $CMST to earn a variable interest APR, which would come from surplus earnings from stability fees. The counter-balancing effects of the borrow APR and deposit APR will govern the long-term supply of $CMST on markets.
An additional stability measure built into the protocol is a stable-mint that allows 1:1 swapping of newly minted $CMST against bridged stablecoins like $DAI, $USDC, and $USDT at a fee. This measure ensures that short-term pegging can be achieved through clear arbitrage for market participants.
Let’s examine some additional security measures that were put in place.
- Token Surplus: In order to maintain the $CMST token and support its continuous and surplus distribution, minting it must be given top priority. You can receive the $CMST token via collaterals and pay less interest, which helps to promote the mining of the token.
- Harbor Protocol: The $HARBOR token serves as the Composite forum’s governance token. It can be used to obtain more stablecoin, increasing the circulation of $CMST. The $CMST token’s future advancements are decided using $HARBOR. The Comdex modular chain’s TokenMint module was used to produce the $HARBOR token, which is built on cosmosSDK rather than CW20 so that it can be used by modules like vault, locker, etc.
- Emergency Shutdown: As a part of extra solvency safeguards, governance can be used to start an emergency shutdown to stop the minting of $CMST with a particular type of collateral asset or a protocol-wide trigger to stop the minting temporarily to prevent further damage.
Learn more about $CMST HERE
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