AgeUSD is a new algorithmic stablecoin protocol and it soon be available on Cardano as soon as the smart contract functionality has been unlocked.
Cryptocurrencies can generally be a good store of value due to their stable and hard-to-change monetary policies. However, they are far from being good as units of accounts and means of exchange. People often incline to just hold cryptocurrencies for the probability of their higher price evaluation in the future. Thus, they are not often directly used for payments.
If you live in a developed country then you probably do not need stable coins. However, people in developing countries need them a lot and they will probably use them if they will get the opportunity to do so. As a third-generation blockchain, Cardano was engineered (under scientific peer review) to provide new state-of-the-art services that the developing worlds needs, like stable-coins. That is a kind of utility that will increase the adoption of smart contract platforms and may in fact be driven by the very real need in developing countries.
Imagine that you plan to establish some sort of business that would be fully decentralized and you had to deal with the price volatility. The market mood would influence your success or failure more than your skills and ideas. According to data from CryptoSlate, there are now over 30 different stablecoin available in the market all of which are trying to solve this issue.
A New Approach
With the influx of stablecoin options comes the development of innovative solutions to the underlying mechanism maintaining their stability. AgeUSD is part of a new class of stablecoin using algorithms rather than collateral to maintain value.
The value of stable-coins must be bounded with something that is stable in the traditional world. Unfortunately, nothing is stable in our world. The stability of fiat currencies is kept artificially. Central banks are responsible for the stability of fiat currencies and have a few financial instruments for that. For example, central banks are able to regulate the number of money in circulation and try to maintain a little inflation. In the turbulent times, however, they are forced to print a lot of new money. Thus, it is difficult to keep low inflation. The price of goods can go up and money gets basically devalued. In such situations, money is a worse store of value but it can still be a good unit of accounts and means of exchange.
We can differentiate between two basic types of stable-coins. The first type is pegged by real money. The second type is pegged by volatile cryptocurrencies. It is easier the implement the first one but it is necessary to trust the third party. The second solution is more decentralized since it is easier to verify that there is locked the expected number of cryptocurrencies. On the other hand, it is more difficult to keep the stability of stable coins when volatile assets are used as the peg. It is necessary to hold a higher value of cryptocurrencies than the value of minted stable coins. Thus, it is possible to absorb price volatility mainly when the price of cryptocurrencies goes down.
Cardano
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.
AgeUSD is a crypto-backed algorithmic stable-coin protocol. ERG or ADA coins will be used as the peg and the algorithm will ensure the stability of AgeUSD and that there is a sufficient number of coins in a reserve.
Stability, simplicity, and legal compliance are basic design principles. It was decided to use a well-established concept and techniques from the traditional financial world to ensure the stability of coins. It is expected that it will be easier to understand it and thus, it will be easier for regulators to accept the solution. The current solutions in the crypto world are quite complex and hard to understand. The team decided to make it simple and not inventing the wheel again.
Another requirement was to avoid using collateralized debt position (CDP). It is a popular design pattern but it was proven that it can fail when the market goes down sharply and the network is clogged. In such situations, users are not able to quickly respond to the situation and the algorithm can trigger liquidations of positions. The AgeUSD protocol does not use CDP. There are no liquidations and users do not need to send transactions quickly to avoid loss of value. The CDP concept is inherently vulnerable and users risk it when using it.
The approach of the AgeUSD protocol is to automate the process as much as possible to avoid relying on sending transactions in situations when the network can get clogged. There are two types of users interacting with the protocol. Reserve providers and AgeUSD users. Reserve providers submit cryptocurrencies like ADA or ERG coins to the decentralized application (dApp). The dApp mints reserve coins (RC). Each reserve coin represents a certain amount of coins that are kept in the reserve. The application needs to have a certain amount of cryptocurrencies in the reserve in order to be able to mint stable coins. AgeUSD users also submit cryptocurrencies and the application puts the coins into the reserve. In this case, the application mints AgeUSD stable-coins.
To summarize that, both reserve providers and AgeUSD users submit cryptocurrencies to the application. The application puts cryptocurrencies into the reserve and mints either reserve coins or AgeUSD coins. The application mints AgeUSD stable-coins only in the case that a required minimum of cryptocurrencies are present in the reserve. If it is not the case then reserve providers must submit cryptocurrencies. Otherwise, AgeUSD users need to wait till it happens.
The application must be sure that AgeUSD users are able to redeem AgeUSD stable-coins for cryptocurrencies at any single moment. The current exchange rate will be used for that. Thus, AgeUSD users can obtain more, less, or the same amount of cryptocurrencies than they have submitted.
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 great potential in the future AgeUSD and Cardano ADA.