Cardano's Stablecoins Compared

First, there were none, and now there are three. So in one weekend, the Cardano ecosystem went from no stablecoins to the announcement of 3, with one already launched.

While Coti’s algorithmic stablecoin Djed didn’t come as a surprise, having a launch date of January 2023 was welcomed by the community.

What wasn’t as expected was the announcement of a regulated, fiat-back stablecoin from Emurgo and trading to start for Indigo’s iUSD.

Today I’ll run you through the various options and some details on each offering. But first, let's start with the key questions.

Why do we need stablecoins?

A more and more globalized economy needs stablecoins. They allow anyone to transfer and receive money internationally without restrictions. Moreover, compared to conventional banks, stablecoins provide much lower fees and quicker settlement.

Stablecoins make it simple for a business owner in South Africa to pay an invoice to a supplier in The Netherlands. While settling an invoice using traditional finance may require dealing with three or more banks and significant fees. In addition, multiple parties participating in the transfer process must be trusted, and a centralized party can stop the transfer at any time.

A crucial component of decentralized finance is stablecoins. The majority of Cardano native tokens are now exchanged against ADA. Unfortunately, ADA is an unstable store of value with poor stability.

Why can’t you just use USDT or USDC?

Why doesn't the Cardano ecosystem use stablecoins like USDT and USDC? Many of you may be asking. Unfortunately, Cardano does not natively support either of these alternatives. Of course, one might bring these tokens onto Cardano through a bridge.

Bridges offer a method to move assets between two distinct cryptocurrency platforms that allow smart contracts. For instance, USDC is secured in a Polygon smart contract. A middleman confirms that the USDC is present in the Polygon smart contract and then sends a command to create an equivalent number of USDC-representing tokens on Cardano.

These USDC-representing tokens can be deposited into a Cardano smart contract and then redeemed for USDC on Polygon. The tokens are then burned as a result. The intermediary recognizes this burning and instructs the Polygon smart contract to release the USDC and send it to the user's provided address.

Bridges are hazardous, though. Cardano users must have faith in new intermediaries if a bridge introduces tokens to the network. Additionally, both the Cardano smart contracts and those on the platform being bridged from, such as Polygon, must be used. The risk of the intermediary being compromised and the risk of the smart contracts on either side being compromised triples the attack vector.

Bridges have a well-known history of being hacked because of these expanded attack avenues. While an attacker takes advantage of a bridge vulnerability to steal the underlying assets that give the stablecoins value, users could continue to maintain their bridged stablecoins kept securely on their hardware wallet.

Centralization risk

Most bridges rely on a central intermediary since it is the most straightforward way to build a bridge. Since there is no government-level insurance, you must have faith in the intermediary, which offers you even less security than a conventional bank.

Decentralized intermediates are a possibility and don't need trust, but you have to give up the security features that Cardano provides. To connect to two different platforms, a decentralized intermediary builds a sidechain. Users of the bridge must rely on an unproven and untested platform to protect their investments because the sidechain coexists with Cardano. You must still have faith in the centralized organization in charge of the stablecoin.

To address the aforementioned, Indigo provides the Cardano ecosystem with a dependable way to use stablecoins while still utilizing the security and decentralization provided by Cardano by supplying a synthetic form of USD.

What are synthetics

Thanks to a synthetic asset, you can gain price exposure to an asset without really owning it. These artificial assets are known as iAssets in Indigo. iAssets behave exactly like the object they are tracking. The price of the iAsset changes along with the price of the tracked asset, whether it is rising or falling.

For instance, iUSD will track the USD price and be worth $1. iUSD will keep its value of $1 regardless of the cost of other market assets.

How Indigo synthetics work

iAssets are each excessively collateralized. This guarantees that the iAsset is backed up by collateral worth more than the iAsset itself, regardless of the state of the market. 100 iUSD, for instance, might be backed by 200 ADA.

Under-collateralized holdings are automatically liquidated if the price of ADA falls. An over-collateralized position essentially replaces the under-collateralized position during the liquidation process. Users' iAssets are still fully collateralized throughout this procedure.

No counterparty risk

There is no need for centralized institutions to be trusted with Indigo's synthetic assets. Furthermore, no group can control Indigo since it will be an unstoppable force.

In addition, iUSD won't rely on a single source of prices. Because iUSD will pull price data from numerous Oracles and price feeds of various stablecoins, it would be immune from such an event if it led to mistrust in a centralized stablecoin like USDT. iUSD would continue to be pegged to $1 even if the price of USDT suddenly fell to 0.

Security measures

There are hazards associated with synthetic assets. For example, it is feasible for synthetic assets on other blockchains to fail to process liquidations rapidly enough to ensure protocol integrity in excessively volatile market conditions. Fortunately, Indigo considered these possibilities.

Thanks to its Stability Pools, Indigo will immediately have liquidity pools to handle liquidations. Additionally, Indigo is adding extra safety procedures and undergoing stringent mathematical stress testing and several audits to maintain stability even after improbable black swan-type incidents. These safety features enable the protocol to re-stabilize following a potential attack, including protocol-level insurance and Indigo Protocol Owned Stability.

Note I have done a deep dive into COTI and Djed, which you can view HERE given this I will only summarize the Djed token below

A crypto-backed algorithmic stablecoin contract called Djed serves as an independent bank. Stablecoins and reserve coins are minted and burned while base coins are kept in reserve. By purchasing and selling stablecoins, using the reserve, and collecting fees that go into the reserve, the contract keeps stablecoins pegged to a target price. Holders of reserve coins, who add money to the reserve while taking on the risk of price fluctuations, are the final beneficiaries of this revenue stream.

The Team
The Djed project is a joint effort of COTI, IOG (the organization that created Cardano), Emurgo, one of the three founding partners of Cardano, and the Ergo blockchain, which also employs UTXO-based accounting.

Early in 2023, USDA, a stablecoin pegged to the USD, will be released by Emurgo, the Cardano blockchain's official commercial arm, and a founding organization.

This will make USDA the first stablecoin in the Cardano ecosystem, fully fiat-backed and compliant with United States regulations.

The USDA product is a component of Emurgo's Anzens program, a more extensive scheme providing customers with a range of financial services and products based on Cardano-based assets. These programs include card payments using cryptocurrency, lending and borrowing services, and connections between established marketplaces and decentralized applications (dapps).

Users will be able to tokenize their USD into USDA via credit/debit cards, wire transfers, or conversion of Cardano's native ADA token when USDA launches on the Anzens platform in Q1 2023, according to Emurgo.

Emurgo has teamed up with a regulated financial services organization with headquarters in the United States, assuring that the stablecoin is fully compliant and follows all legal requirements.

With a long-term goal of enabling conversion and swaps of cryptocurrencies like bitcoin (BTC), ether (ETH), and other cryptocurrencies, Emurgo will soon enable the tokenization of USD along with the conversion of other stablecoins, such as USD Coin (USDC) and tether (USDT), to USDA.

Conclusion

Stablecoins have long been a missing puzzle piece in Cardano. To soon have the option of three will help the ecosystem's growth.

While I love the concept of algorithmic stablecoins, I am most bullish on USDA winning out. With all the anxiety in the crypto ecosystem, I think markets will gravitate to a regulated fiat-backed stablecoin issued by such a prominent player within the Cardano space. I’d be keen to hear which of the three options you’d be most open to using as your stablecoin.