Last year, with the crypto bear market full steam ahead, many heralded the rising of a new breed of crypto assets that could help anyone who wishes to protect his or her investments from the Wild Wild West market volatility: stablecoins.
Several projects took the notorious Tether as a model while others – like DAI – proposed a new form of collateral based on cryptocurrencies.
Indeed, it was a matter of time until someone would turn their attention to the emerging Tezos and think of a Tezos based stablecoin.
The draft of such a project is out one year after the launch of the mainnet and promises to solve the problems encountered by companies like Tether. Moreover, it may also address the problems that could arise in case cryptocurrencies are used as collateral.
What is USDtez?
USDtez is a new stablecoin project that could actually help the bakers and the Tezos ecosystem overall.
At first glance, it looks very similar to Tether aka USDT or USD Coin: a digital token pegged by FIAT, particularly the US Dollar. In other words, each USDtez has an intrinsic value of 1 USD, no matter the market sentiment, bullish or bearish.
Does this mean every future USDtez minted will be backed by 1 USD in FIAT reserves like the case with Tether? Not necessarily.
In fact, the most recent investigations showed the most popular stablecoin is not quite 100% backed by FIAT reserves. Even the company behind USDT admitted it has used cryptocurrencies as collateral and may continue to do so, in the future.
According to USDtez’s recent FAQ, the token will be pegged to Tezos (XTZ) and the ultimate goal is for 1 USDtez to be equal to 1 USD worth of tezzies. ‘Price oracles’ – algorithms that gather data from cryptocurrencies exchanges and calculate an average with the help of those readings – will set the price of USDtez in XTZ, at any given time.
Isn’t it dangerous though to use a volatile asset as collateral?
A Hybrid FIAT/XTZ Collateral System
Yes, it is. Pure crypto collateralization like the trending DAI can be quite valuable during extended bull markets. Yet, what happens in case of a major bear market or continuous pump-and-dump patterns that can destabilize the ecosystem?
What if, for example, at one point in time, there is a total supply of 1 mil USDtez backed by 500,000 XTZ (1 XTZ = $2) and in a matter of days, the price plummets 50% and 1 XTZ = $1. In this case, there would be a major under-collateralization. Since 1 XTZ is $1, the reserves would be equal to $500,000, even though there may be still 1 mil USDtez in the market.
That is why USDtez won’t actually use a pure crypto collateral system, but a hybrid one. The start would be a pure FIAT-based collateral for minimum risks.
For example, let’s say USDtez Foundation – the company behind the Tezos stablecoin based in Switzerland – mints 10 million tokens at launch. That would mean the Foundation will be responsible for sourcing $10 million in FIAT from various creditors, immediately made available in case of a bank run, similar to an insurance policy.
Those 10 million tokens minted will eventually hit the exchanges and offered to anyone interested. Each USDtez sold will be converted into Tezos at the exchange rate set by the price oracles (for example 1 USDtez will be converted into 1 XTZ if 1 XTZ = $1). The Tezos accumulated from the selling will be used for baking. The baking rewards will be used to pay for the $10 million credit.
What if the XTZ price plummets? The $10 million credit will remain in effect, so 1 USDtez will still be $1 in case a user wants to redeem its FIAT value. Only the value in XTZ will actually increase.
What if the XTZ price skyrockets? The Foundation will be able to liquidate the initial credit with a part of the tezzies accumulated. The rest will be used for baking which will lead to an increase in collateral and token supply.
For a more in-depth look at the dual-backing proposed USDtez, check the project’s latest Medium blog.
Initially, USDtez Foundation – a future Swiss company– will manage the funds and the stablecoin.
However, in the future, the leaders of the project plan to migrate towards a DAO (Decentralized Autonomous Organization) governance system with no unnecessary concentration of power. Like with Tezos, where governance (proposals, upgrades, as well as voting) is made on-chain, the active participants of the USDtez community will ultimately decide upon the future of the stablecoin and organization as a whole.
More details about the upcoming DAO will be made available to you via TopNewCrypto.com as the project moves forward and releases the official whitepaper.
What do you think of the upcoming USDtez stablecoin project? Will it solve the problems of the current stablecoin market? Will it provide Tezos ecosystem the much-needed liquidity and added value? Have your say in the comment section below!
Images courtesy of USDtz.com, Tezos.com & Pxhere.