this article is the continuation of our previous post on Why Stabelcoins Lose Peg?
In the past few weeks, stablecoins have been in the news for all the wrong reasons. In the wake of the UST stablecoin crash, everyone is questioning the stability these coins promised to provide.With so many types of stablecoins in the market today, in this article, we outline important differences between them and point out the traits of the most promising stablecoin. We then show how our forward-thinking analysts and engineers at Balance and FHM designed a robust stablecoin USDB to maintain its peg. We hope this information will help you, as an investor, make the right decision and keep your hard-earned money safe and secure in the DeFi space.
USDB combines the benefits of algorithmic, crypto & fiat-backed stablecoins and employs three (soon to be five) strategies to maintain its peg.USDB has a treasury. Having a treasury with a combination of decentralised assets allows for the stablecoin to have censorship resistant backing. These assets are liquid and can be sold if needed to restore the peg. This is exceptionally powerful, allowing for quick reactions to market instability.
Protocol Owned Liquidity (POL) is the second mechanism that USDB has to maintain its peg. The advantage and strength behind this concept is that liquidity providers, also known as rented liquidity, cannot manipulate or cause significant shifts in the price.We saw that during volatile market conditions that LP providers could pull their liquidity to cover or over collateralize other positions they had. Resulting in there not being sufficient liquidity for the tokens in circulation. Thankfully we had mechanisms in place and do not rely too heavily on the mercenary capital so we held peg.By owning all our liquidity it insures that rented liquidity cannot manipulate or cause significant price shifts. This shift allows for the supply to be as elastic as possible to maintain the peg and ensures that every USDB in circulation can be returned for the $1 value if needed.Algorithmic relationship with FHM token. As a last resort with regards to the current crypto based backing the FHM token acts as a backing for USDB. The token can be sold or burnt to provide further backing for USDB if needed. This is a last resort measure if the above two backing systems cannot maintain the peg for some reason.These situations are highly unlikely as they would have to be due to systems not functioning as expected. However, having this third fail safe in place would give investors in USDB comfort in knowing that their stables are backed even further.
CDP, or Collateralized Debt Position. These CDP based structures are created whereby users deposit their assets and receive USDB in return. This would essentially assist USDB to be over collateralized. While this strategy appears to be attractive at first glance it does make the backed part of this slightly illiquid. However, having it in conjunction with other mechanisms adds significant value as the collateral provided is greater than the amount of USDB given out. Thus adding further stability to maintaining the peg and giving investors confidence.Lastly, if all the crypto mechanisms were not enough a portion of USDB will also be backed by Fiat. With USDB moving into the e-commerce space there is a need to maintain a certain amount of off-chain collateral in order to further diversify risk and operate in the “real world”. Profits generated off-chain will be kept as a reserve towards on-chain USDB thus resulting in yet another method to add confidence to the USDB holder.We will use the above list to evaluate the existing stablecoins to determine which one is the most promising.
A stablecoin’s performance and integrity are heavily dependent on how it behaves under stressful conditions, which include not just market volatility but also intentional attacks on its governing protocol. Whenever investors lose confidence in the algorithm, the peg falls, which causes a chain reaction.
The Balance Organization is formed to administrate business development in service to the greater vision of the interplay between FHM and USDB. As such, profits from all ventures engaging USDB as a commercial exchange of value will be used to buy back and burn FHM to increase our deflationary velocity at a rate tied to our business success in product developments.