By George Ward
Several stablecoins have emerged, each backed by various assets to help lower the inherent volatility of cryptocurrencies and other digital assets. Recently, Tether, a prominent stablecoin issuer, developed a new gold-backed stablecoin (Alloy or aUSD₮). This guide explores Alloy’s mechanics, advantages, characteristics, and working ideas.
Understanding Tethered Assets
Stablecoins, or tethered assets, are a class of digital tokens designed to have a constant value by being linked to reference assets like diverse portfolios, commodities, or fiat money. Stablecoins attain and maintain stability through several processes, notably solid liquidity pools in secondary markets and over-dollateralization—maintaining reserves beyond the value of the produced tokens.
Stablecoins vary depending on the collateral backing they use. For example, commodity-collateralized stablecoins are supported by actual assets such as gold or oil. In contrast, fiat-collateralized stablecoins are backed by currencies such as the US dollar or the euro.
Tether’s Method of Stabilization
A well-known example of a fiat-collateralized stablecoin is Tether-issued USDT. It is set 1:1 to the US dollar and keeps this peg using regular attestations and quarterly disclosures describing its reserves. Therefore, its reserves match the amount of USDT in circulation.
Introducing Alloy (USD₮)
Designed to track the US dollar using Tether Gold (XAU₮) as collateral, Alloy (aUSD₮) is Tether’s latest innovation. It facilitates smooth interoperability inside the larger Ethereum ecosystem using Ethereum Virtual Machine (EVM)-compatible smart contracts.
This compatibility allows aUSD₮ to combine seamlessly with several Ethereum-compatible blockchains and distributed apps. Alloy (aUSD₮) has a unique quality in its collateral – Tether Gold (XAU₮), a digital form of actual gold. Stored safely in a Switzerland vault, one XAU₮ token equals one troy ounce (31.1 grams).
How Alloy (aUSD₮) Works
aUSD₮ operates on three fundamental ideas—over-dollateralization, vaults, and liquidation mechanisms.
Over-dollateralization
The value of Tether Gold (XAU₮) greater than its face value backs aUSD₮ tokens, providing a buffer against possible price swings. This over-dollateralization guarantees that aUSD₮ stays constant even if the gold price moves.
Users of a USD₮ must deposit a designated XAU₮ into a smart contract. Moreover, a collateral-to-asset ratio—the liquidation point—determines the most aUSD₮ that can be issued.
Vaults
The Vault smart contracts, built on Ethereum-compatible technology, are the foundation for managing and creating aUSD₮. These contracts ensure a secure, decentralized, and transparent validation of the XAU₮ collateral that backs the circulation of aUSD₮.
Moreover, only entities that have undergone a rigorous Know Your Customer (KYC) verification process can interact with the Vaults, ensuring high compliance and security in the minting of aUSD₮.
Maintaining the integrity of the system depends much on vaults. They track the solvency of the collateral positions constantly and employ assigned oracles to ascertain the XAU₮ token prices and match tied asset values. This guarantees a 1:1 peg between the American dollar and this stablecoin.
Liquidation systems
Liquidation is the process wherein the value of the collateral supporting an issued amount falls below a predefined level. With a liquidation threshold of 75%, each collateralized position (CMP) represents the highest percentage of the collateral value that can be issued.
Authorized liquidators can recover users’ XAU₮ and repay aUSD₮ up to the initially minted amount if a position approaches its liquidation threshold. By obtaining the collateral at a slight discount, liquidators control these holdings, preserving system solvency and preventing under-dollateralization.
Benefits of Alloy (aUSD₮)
aUSD₮ offers numerous benefits, like gold collateralization and transparency through publicly auditable smart contracts. aUSD₮ offers a consistent store of wealth by combining the inherent worth of gold with the stability of the US dollar.
Underlying aUSD₮, the Ethereum blockchain uses auditable smart contracts for open and safe minting and redemption mechanisms. Further helping yield production and smooth integration with distributed finance (DeFi) platforms are the over-dollateralization methodology and fit with the Ethereum ecosystem.
Operating mainly on-chain, aUSD₮ offers investors stability, diversity, and passive income possibilities via yield generated from over-dollateralization.
Retrieving XAU₮ Deposited as Collateral
Requesting a withdrawal from Alloy via the intelligent Vault Tether contract allows users to access deposited XAU₮. The maximum-to-value (MTV) ratio has to remain under 75% (liquidation point) to avoid denial.
Before withdrawing all their XAU₮, users must repay the whole minted aUSD₮. Users must buy more aUSD₮ on the secondary market to pay the entire return as determined by the fees paid during minting and returning.
In Summary
Combining the security of the US dollar with the intrinsic value of gold, Tether’s Alloy (aUSD₮) is a significant development in the stablecoins industry. Through transparent operations, smart contract infrastructure, and over-dollateralization, aUSD₮ presents a dependable choice for investors looking for a stable investment in the volatile crypto industry.
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