Stablecoins in Polkadot Ecosystem
Cryptocurrencies have a number of advantages, one of which is that they do not require trust in an intermediary institution to send payments, allowing them to be used by anyone on the planet. However, their major downside is that cryptocurrency prices are volatile and fluctuate wildly. This makes them difficult for ordinary people to use. In general, individuals want to know how much their money will be worth in the long run, and that is why stablecoins exist.
Stablecoins are classified into two main types: those that are backed by reserves of assets (such as fiat currency, bonds, commercial paper, or even other crypto tokens), and those that are algorithmic, or “decentralized.” Algorithmic stablecoins have no reserves. Instead, their value is meant to be maintained through a complicated system involving exchanges for free-floating assets in order to manage supply.
Most likely, you are already familiar with well-known stablecoins such as USDT, USDC, BUSD and some others. But are they integrated into the Polkadot ecosystem? So far only one, but this is already a great accomplishment.
Kusama Network and USDT
Tether (USDT), the largest dollar-pegged stablecoin with a market valuation of more than $80 billion, is appearing on Kusama — a network of parallel blockchains that operates as Polkadot’s canary network. Kusama is always the first to adopt significant protocol changes and other innovations before they are implemented in the more traditional Polkadot environment.
USDT has an “asset tag’’ that enables Polkadot and Kusama’s rule-operating relay chains to identify tokens other than their native cryptocurrencies (DOT and KSM). As a result, the stablecoin will drive transactions on Kusama’s Statemine, required for asset deployment and balance-keeping of various fungible and non-fungible tokens.
The launch was announced by Tether in its Twitter account on the 6th of April 2022:
“We are expecting the launch of Statemint in the next few months,” Ardoino told The Block magazine. “But the roadmap is not yet finalized, and so this is all still in the planning stages.”
Polkadot’s native stablecoin — aUSD
aUSD was designed by Acala, when the team identified one common requirement among all future parachains and DApps built on Polkadot and Kusama: a decentralized stablecoin.
It was named aUSD and became the default decentralized stablecoin in the Polkadot ecosystem, enabling the generation of stable currency using a basket of collateral reserve assets. Following the development of the aUSD mechanism, Acala set out to build an application-specific blockchain to support and promote aUSD, as well as enable a stable DeFi ecosystem with aUSD at its core. This ecosystem has DApps designed to support and manage the stablecoin, such as the Acala Swap decentralized exchange and the ‘Homa’ protocol for DOT liquid staking.
The stablecoin protocol developed by Acala was first introduced on two networks (both were using the same protocol), but had separate governance structures and token symbols: aUSD and kUSD. Then kUSD was officially upgraded to aUSD, uniting two stablecoins into one.
The source that powers Acala is ACA (Acala’s native fee, governance, and utility token). It allows users to perform transactions on the network, hold a stake in the network’s on-chain Treasury, have a say in all governance decisions, and mint aUSD.
So how does the Acala stablecoin protocol work?
It employs a multi-collateral backing method to generate a soft-pegged stablecoin to the US dollar and creates a stable currency out of a pool of reserve assets. This allows consumers to deal, sell, and provide services with aUSD while preserving control of their reserve funds such as DOT, ACA, Polkadot derivatives, and assets bridged from other consensus networks such as ETH or BTC. The main purpose of aUSD is to be the most usable form of decentralized stable currency in the Polkadot ecosystem, acting as the default pair, routing asset, and means of exchange for all users and builders.
The $250 million aUSD Ecosystem Fund was established by Acala, nine Polkadot parachain teams (Astar, Centrifuge, Efinity, HydraDX, Manta, Moonbeam, OriginTrail, Parallel, Zeitgeist), and some supporting venture funds to aid newly launched projects creating products with solid stablecoin use cases on either Polkadot or Kusama parachain. In addition to money markets, DEXs, derivatives, asset management, DAOs, payments, and other use cases, the fund participants are looking for Solidity or Substrate-based apps that increase yield or utility for aUSD.
XSTUSD — A Stablecoin on SORA
XOR SynThetics (XST) is the SORA ecosystem algorithmic stablecoin that was first introduced in 2018 and is based on Irving Fisher’s compensated dollar principles. It is backed by XOR (utility & governance token used on the SORA network for transaction fees) and linked to a target index, created by community governance. XOR can be minted or deminted so that the value of the pegged index is always guaranteed. The first implemented index is connected to the value of DAI and called XSTUSD.
Other Polkadot stablecoins
BAI is the native stablecoin of the decentralized money market AstridDAO. It is fully backed and hard-pegged to the US Dollar. Instead of extremely variable interest rates, a minimal one-time fee is required to borrow BAI against different crypto assets.
FRAX became the first stablecoin that integrated collateral (such as MakerDAO’s DAI) with algorithmic stablecoin design principles to develop a new scalable and de-trusted stable on-chain currency anchored 1:1 to the US dollar. About $1.4 billion worth of FRAX has been produced so far.
The “mad” designated assets (madUSDT, madUSDC, madDAI and others) are all bridged from Ethereum to Moonbeam Network via Nomad. They are one-to-one tied to their Ethereum equivalents, such as USDT, USDC or DAI through collateralized minting. This also applies to “any” tokens (anyUSDC or anyUSDT) that were bridged from Ethereum to Moonbeam through Multichain (also known as AnySwap).
In order to enable low-slippage trading for stablecoins and many types of the same assets, StellaSwap, the decentralized exchange (DEX) on Moonbeam, has recently announced the deployment of its correlated-asset automated market maker (AMM). Liquidity dispersion is lessened with a stable AMM by building asset pools with numerous variations of the same stablecoins. Consider USDC as an illustration: users can trade between different types of USDC and increase overall liquidity by having anyUSDC, madUSDC, and celerUSDC (such tokens can usually be redeemed to USDС with ease) in the same stablepool. This is equivalent to having a three-pool or four-pool of the same asset. In addition to lowering inefficiencies in farm emissions, having more than two assets in a single pool concentrates liquidity into core pools.