AgeUSD: The First Stablecoin On Cardano

By April 18, 2021DApps
Click here to view original web page at medium.com

Cardano, the blockchain project behind the 5th-largest coin (ADA) by market cap, is about to receive its first stablecoin — AgeUSD.

Earlier this year, EMURGO has announced the launch of “AgeUSD”, the first stablecoin on Cardano. AgeUSD is a new algorithmic stablecoin protocol developed on the Ergo Blockchain in a joint partnership between the Ergo Foundation, Emurgo, and Charles Hoskinson’s Input-Output Global (IOG), the parent company of IOHK. However, according to Roman Pellerin, AgeUSD will also be available on Cardano as soon as the smart contract functionality has been unlocked.

With Charles Hoskinson, the founder of Cardano and co-founder of ETH, onboard.. looks promising, doesn’t it?

If you are new to Cardano, please read this article first.

Emurgo and Cardano worked on the new stablecoin together — pexels.com, edited by the author

The blockchain project was created around Charles Hoskinson, who originally worked for Ethereum. He has founded a company called Input Output Hong Kong (IOHK), which is working with the Cardano Foundation and Emurgo from Japan on the fundamentals and business models of Cardano. The big difference from Ethereum is (similar to DOT): Cardano runs on Proof of Stake (PoS) with the in-house consensus algorithm Ouroboros and is therefore where ETH 2.0 also wants to go.

With its versatility and community-focused design, it will enable teams worldwide to build new projects. In a recent interview, the founder hinted that they could attract a government as a customer on the African continent. Cardano is also increasingly positioned in the field of “Decentralized Finance” (DeFi).

Unlike Ethereum-based crypto-backed stablecoins, such as DAI, Emurgo introduces a Staticoin protocol-inspired design that does not rely on CDPs (Collateralized Debt Positions). The reason for this is the vulnerability of CDP-based protocols in terms of high volatility and blockchain overloading.

As Emurgo states, “Black Thursday,” when MakerDAO CDPs were triggered into liquidation due to volatility and then sold for $0 due to blockchain jams that prevented others from bidding, demonstrated that a new design is needed. For AgeUSD, this scenario is not possible.

Thanks to its design, the scenario that happened on Black Thursday is not possible for the AgeUSD protocol. Without CDPs, we do not have liquidation events nor the requirement for users to perform transactions to ensure that the liquidations actually work properly (rather than allowing a bad actor to steal funds away from the protocol). These are inherent vulnerable facets of using CDPs for minting stablecoins, and as such expose more risk to the end users. — github.com

Goal

Emurgo’s goal is to automate as much as possible within the mathematics of the protocol itself, “rather than relying on dynamic transaction postings that can break down in a blockchain overload. While this doesn’t mean the AgeUSD protocol “solves all stablecoin problems”, it is an attempt to create a higher-security alternative to current trends in the crypto sphere.

According to the GitHub repository, there are two types of parties interacting with the protocol within the protocol: Reserve providers and AgeUSD users. The first pay ERGs, Ergo’s native currency, into the dApp’s reserves, thereby minting “Reserve Coins” that represent ERG reserves. Users of the protocol also deposit ERGs into the dApp reserves but create AgeUSD instead.

This is only allowed by the protocol if there are enough reserves above the reserve ratio in the dApp. Users can redeem AgeUSD for ERGs from the reserve at any time. Reserve providers can only do this if “the price of ERGs increases or a significant amount of protocol fees is collected, covering the value of all existing minted AgeUSD plus an additional margin”.

As such Reserve Providers allow AgeUSD users to enjoy stability of value. On their end, the Reserve Providers absorb the potential upside (if the value of the reserves goes up via the price of Ergs increasing compared to USD) but also absorb the potential downside (if the underlying cryptocurrency in the reserve goes down in price). — github.com

The default AgeUSD protocol fee configuration is a 1% protocol fee and a 0.25% front-end implementer fee.

A user on Reddit summarized his take on the AgeUSD hype:

1) It will be a stablecoin that is made from heavy research. It took a long look at dai (but also waves sc), saw it flaws which lead to massive collateralization during black Thursday (eth being sold for almost 0 dollars, google this!) And they found ways for a stablecoin to not be manipulated, not that easy anyways. This will be the decentralized stablecoin to rule others.
2) It’s also a decentralized coin that anyone can access as long as one can get his hands on ADA or ERG. This is not a custodian coin that has a centralized entity behind it as tether or usdc.
3) AgeUSD will be one of the first defi projects for both ergo and Cardano! This means a new utility for those two tokens, which gives value towards both tokens/projects.
4) The way ageUSD works is amazing and makes it a very interesting defi project. Just like banks use to have reserves towards what they loan out (think it has been low like 10–20% to even 0% nowadays…), ageUSD will work the same way. To make sure the price is pegged to $1, the way it works is the protocol needs to be feed with ergs or ada that work as reserve. The users who loan these coins will receive reserve coins for it. These coins represent the ratio of ergs/ada and dollar price in the reserve bank. Now it’s possible to take “loans” out in the form of a stablecoin. These users will “trade” ergs or ADA for ageUSD and gain the $ value of their token minus a small fee.
reddit.com

AgeUSD tries a new approach to create a stablecoin linked to the USD. The technological setup seems promising and the team is strong. I see potential in the future for the AgeUSD.

Cardano (ADA) itself is already considered a highly ranked cryptocurrency within the scene.

“There are more than 3,000 internet currencies besides Bitcoin and ADA, and the list is probably getting longer. Not every cryptocurrency has a specific use or is accepted by the masses. Bitcoin may be the undisputed number one internet currency, but Ripple, Litecoin, and ADA are following close behind. Cardano’s potential is particularly high due to its versatility and problem-solving capabilities, with faster, more energy-efficient, and more transparent transaction processing due to its PoS algorithm.” (Maximilian Perkmann, Cardano: The New Kid On The Crypto Block?)

In the comparison with DAI, for instance, there is also a smaller downside. DAI is backed by collateral of multiple cryptocurrencies, while AgeUSD is only backed by ADA/ERG.

The article includes the personal opinion of the author.

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