How EQD Differs from Algorithmic Stablecoins (like UST) and Its Protection from A Meltdown
The global crypto market has lost two-thirds of its value from its November all-time high of $3 trillion to $1 trillion. And from November, when Bitcoin reached its all-time high of $69,000, it lost 70% of its value. This instability and volatility make crypto-assets a questionable store of value. And this is what gave rise to the need for stablecoins.
Last Updated on June 1st, 2023
EQD was originally designed to accept EQ as collateral. This was later changed and thus EQD can not be minted using EQ as collateral.
Here is the list of assets currently accepted as collateral:
DOT, eqDOT, USDT, xDOT, cDOT, GLMR, ASTR, INTR, IBTC, ETH, USDC, PARA, GLMR
What are stablecoins?
Stablecoins are cryptocurrencies designed to hold a 1:1 value with traditional fiat currencies (in most cases, the U.S. dollar).
The utility of stablecoins is to provide price stability and minimize cryptocurrency volatility risk. And they achieve this stable valuation by pegging their price to the U.S. dollar. This makes stablecoins like Tether USD and Equilibrium EQD different from other crypto-assets in that they’re not designed to grow in value and make their owners wealthy, as with the case of BTC, ETH, and the other cryptos.
Stablecoins not only act as a safe haven against the volatility in the crypto market, but they also serve as a store of value and medium of exchange in the blockchain. So when you buy 100 USDT (a stablecoin), you can expect it always to be worth $100 regardless of the market swing.
Another importance of stablecoin is that, unlike fiat currencies controlled by central authorities and closed overnight or on the weekends, stablecoins (like DAI and EQD) are readily available on the Blockchain and accessible so traders can easily swap them for other cryptocurrencies 24/7.
But how do stablecoins maintain their value to the fiat dollar?
Types of stablecoins and how they hold their value
There are four ways stablecoins hold their 1:1 value with their pegged assets. Some stablecoins maintain their value by being backed by a couple of real-world assets such as fiat currencies and commodities. Others use crypto-assets as collateral to over-collateralize their stablecoins, while others use algorithms to adjust the supply of their stablecoins.
Now let’s go more in-depth.
Fiat-collateralized stablecoins
Fiat-backed stablecoins maintain their stability by being backed by either fiat currencies such as the US dollar.
For example, cash asset-backed stablecoin, Tether (USDT), is collateralized by fiat US dollar, treasuries, and commercial paper. It maintains a cash reserve in a financial institution that matches its total value. In principle, the prices of stablecoins are locked to a reserve currency. This way, if you withdraw a stablecoin, the equivalent will also be taken out from the reserve to balance the system.
Commodity-backed stablecoins
Commodity-backed stablecoins are similar to fiat-collateralized stablecoins. The major difference is that instead of being insured by a fiat currency, they are insured by precious metals like gold or other commodities such as oil and real estate.
Crypto-collateralized stablecoins
Crypto-collateralized stablecoins are also similar to fiat-collateralized stablecoins, except that they’re backed by other cryptocurrencies rather than a fiat currency. Equilibrium dollar (EQD) is one of such crypto-collateralized stablecoins.
Crypto-collateralized stablecoins, like EQD, are over-collateralized such that the value of the collateral exceeds the value of the stablecoins. The idea is to cushion the effect of crypto volatility or price fluctuations. For example, a cryptocurrency reserve of EQ tokens worth $2 million may be used to collateralize EQD worth $1 million. And more collateral can be added to top up the reserve in the case of a shortfall.
Algorithmic stablecoins
Algorithmic stablecoins also called algo stablecoins, depend on an algorithm or a smart contract to maintain their stability. This is opposed to stablecoins backed by other asset classes.
They have no physical, cash, or over-collateralized cryptocurrency assets backing as in other stablecoin classes. Algorithmic stablecoins like TerraUSD (UST) are backed by a computer program to control their supply.
The reason why TerraUSD failed
Algorithmic stablecoins such as TerraUSD sustain their supply by relying on smart contracts to create or destroy units of the stablecoin (using a mint and burn mechanism) depending on demand and supply. When the stablecoin trades above the dollar peg, more tokens are minted to reduce its value, and if it trades below the peg, more tokens are burned to bring the price down.
To maintain its dollar peg, UST was designed to work in tandem with LUNA, TerraUSD’s sister currency which had a variable value because the market set the price — a strategy that wasn’t sufficient to withstand the market volatility.
To incentivize Terra holders to swap their UST for LUNA and maintain the peg, Terraform Labs set up an arbitrage system where 1 UST was equal to $1 worth of LUNA. So any time the value of 1 UST grew over $1, traders swapped their LUNA for the over $1 worth of UST for a quick profit, thereby creating more UST in circulation and bringing down its price. On the other hand, when 1 UST was less than $1, traders swapped their less valuable UST for $1 worth of LUNA for profit — this reduced the UST price.
So Terra had no real backing; the system was inefficient as it depended on the algorithm to balance its circulation.
How is EQD different from other types of stablecoins?
Equilibrium’s stablecoin (EQD) is a crypto-collateralized stablecoin that runs on top of our on-chain risk management and bailout mechanisms to insure it against losing its dollar peg. We have developed a multi-layer system to sustain its liquidity so that it will be unaffected by the volatility in the crypto market.
Here is why EQD has a more efficient and working stablecoin than TerraUSD and other algorithmic and collateral-backed stablecoins.
EQD vs. fiat-backed stablecoins
Decentralized and transparent: Fiat-backed stablecoins have deep liquidity and are collateralized by real assets. However, they tend to be centralized as their cash reserves are locked up in offshore banks. In the case of USDT, there’s a lack of transparency as they have claimed their holdings are audited, but little is known of the auditing company and Tether’s cash reserve.
EQD, on the other hand, has deep liquidity and is collateralized by Blockchain-based cryptoassets that can be accounted for as we run a transparent system.
EQD vs. other collateral-backed stablecoins
3-layered protection system: Unlike other collateral-backed stablecoins, Equilibrium has developed a formidable framework to ensure there’s deep liquidity in the treasury and that EQD’s value is not affected by fluctuations in the market.
First, we are over-collateralized to avoid liquidation when borrowers take out EQD as loans. In the event that borrowers get liquidated, the second layer is an insurer’s pool. This pool of insurance funds provides liquidity for our stablecoin.
And finally, if for any reason the insurer’s pool gets liquidated too, our third protection layer is Equilibrium’s treasury which is always ready to recapitalize liquidations.
Deep liquidity: The Equilibrium treasury holds approximately 27% of the entire Equilibrium supply. That’s $23 million dollars worth of EQ tokens, equating to 3.3 billion EQ tokens. So you can rest assured that EQD is adequately backed to secure the pool.
Low-collateralized lending: Compared to other crypto-collateralized stablecoins, EQD requires low collateralization of 105%, while DAI requires minimum collateralization of 150% of borrower positions.
The collateral supported by EQD is BTC, ETH, and EOS, while those supported by DAI include ETH, WBTC, USDC, COMP, and BAT.
Despite this low collateral requirement, EQD has been fully insured against volatility and liquidations. Most stablecoins rely on auctions to manage liquidation risk, but this mechanism is inefficient. We have developed a more reliable mechanism for EQD called bailsmen that provides liquidity in advance — this minimizes borrower risks.
EQD vs algo stablecoins
Backed by valuable crypto-assets: First, UST and other algo stablecoins aren’t backed by collateral. Instead, they rely on a smart contract to maintain their dollar peg — this system is doomed to fail. In contrast, EQD is a collateral-backed stablecoin backed by real, valuable assets — EQ tokens. This is a more efficient system than a computer program’s backing.
Wrapping Up
Regardless of TerraUSD’s torpedo and the recent FUD around reserve assets of USDT and USDC alike, stablecoins are here to stay, especially as a means of exchange in the Blockchain. UST was designed to fail from the beginning because it had no solid backing.
EQD has a solid 3-layered backing to insure it against losing its peg.
We have also created a wide range of utilities for EQD. First, it will be integral to our upcoming money market beta release. Users will be able to mint the stablecoin against their collateral portfolio and use it as a quote asset inside Equilibrium DEX.
The Equilibrium team also plans to make EQD truly cross-chain so it will be the same stablecoin both for Kusama and Polkadot ecosystems. Plus, it will be useful in our ETH-like bridges.
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About Equilibrium
Equilibrium is a one-stop DeFi platform on Polkadot that allows for high leverage in trading and borrowing digital assets. It combines a full-fledged money market with an orderbook-based DEX. EQ is the native utility token that is used for communal governance of Equilibrium. xDOT is a liquid and tradeable wrapped DOT that unlocks liquidity of DOT locked in parachain auctions and delivers multiple crowdloan bonuses on Polkadot.
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