Cardano will have a USD-backed stablecoin
EMURGO is the official commercial arm and one of the three founding entities of the Cardano project. The entity announced the planned launch of a new US dollar-backed USDA stablecoin. The launch is scheduled for Q1 2023. Cardano will...
EMURGO is the official commercial arm and one of the three founding entities of the Cardano project. The entity announced the planned launch of a new US dollar-backed USDA stablecoin. The launch is scheduled for Q1 2023. Cardano will have its own stablecoin, an essential part of any DeFi ecosystem.
TLDR:
- USDA requires trust in a third party.
- USDA will be native Cardano tokens.
- Banking the unbanked dream can become a reality thanks to stablecoins.
How USD-backed stablecoin works
A USD-backed stablecoin is the simplest form of enabling the creation of a stablecoin. It is essentially a tokenized USD. A third party, usually a bank, holds real USD in a bank account and mints a native token on the Cardano network at a 1:1 ratio. For example, 1000 USDA tokens are to be minted for 1000 USD. One USDA token will be worth one USD. The USDA holder can exchange USDA back to USD at any time. In this case, USDA will be burned, again in the 1:1 ratio.
Users will be able to tokenize their USD to USDA via credit and debit cards, bank transfers, or ADA conversion. Later on, other crypto-assets like BTC or ETH will also be supported.
EMURGO has partnered with a regulated financial services company based in the United States that will custody cash deposits, assuring USDA is fully compliant and adheres to regulatory guidelines. At the time of writing, no further information is known about who will provide this service.
From a decentralisation perspective, it is important to know that you have to trust a third party when using stablecoins. The number of tokenized USDA must match the USD in the custodian's bank account. The bank account should be regularly audited by an independent third party and the result of the audit should be publicly available. Banks often do not hold 100% of deposits in USD and use other assets for collateral. This is common practice and potential risk if the portfolio is made up of assets that may lose value against the USD.
The most famous stablecoins that work on the same principle are USDT and USDC. USDT is not considered by some to be a trustworthy stablecoin because Tether refuses to have an independent audit by a trusted auditing company. Confidence in stablecoin could be shaken if it turns out that the bank is not holding an adequate amount of capital against minted tokens. Stablecoin could thus lose value against the dollar, which is undesirable from the perspective of users.
A trusted third party and regular public audits from a trusted company are an essential part of the reliable operation of stablecoins such as USDT, USDC and now USDA.
USDA will be native Cardano tokens
USDA will be native Cardano tokens. Users can keep USDA in their wallets and send them to anyone else on the other side of the world. You will only pay the usual ADA fee to send USDA and avoid high fees and delays related to the usage of the legacy banking and payment infrastructure. Users can send a transaction with any amount of USDA from Europe to the US (or vice versa) in a matter of tens of seconds.
It can be expected that USDA will begin to support most DeFi services in the Cardano ecosystem. Stablecoins are very important mainly for lending services.
Emurgo has announced that it will enable convenient conversion from USDT and USDC to USDA. If you currently hold these stablecoins on an exchange, for example, you cannot use them in the Cardano ecosystem. The new service will allow you the conversion to USDA, so it will be possible to break away from dependence on centralized exchanges and hold USDA in your own Cardano wallet.
Stablecoins are very important for countries where inflation is high and users cannot rely on national currencies. Stablecoins pegged to the value of the dollar can protect the value they have created.
Banking the unbanked dream can become a reality thanks to stablecoins. The Cardano network is being built to remain financially accessible even for poor regions, enabling not only the transfer of value but also basic financial services such as lending and borrowing.
Building networks such as Hydra and other functionalities such as decentralized identity (DID) will continue to increase the overall financial utility and social relevance of the Cardano network.
USDA is the first product being brought to market within Anzens. Anzens is a new product suite which aims to bridge the gap between traditional finance and DeFi. Anzens will enable regulated lending services. It will also make it easier for banks and traditional financial services to use Cardano technology.
The meaning of stablecoins
The high volatility of cryptocurrencies prevents real use not only for payments but especially for financial services like lending and borrowing. A stable economic environment is essential for any business. The growth of purchasing power is a pleasant phenomenon, but if it is accompanied by the risk of a sudden or long-term decline, it becomes a nightmare.
If you decide to sell ADA coins, you must go to a centralized exchange. This, as has been shown in the recent past, is very dangerous. A centralized exchange can declare bankruptcy, freeze user deposits, provide data to third parties, or be hacked. In addition, most large exchanges require KYC/AML. In the near future, you will be able to buy or sell ADA using USDA. You will be able to do so through DEXs. Self-custody will become a reality even for such a basic activity as buying and selling coins.
Some people sometimes think that buying cryptocurrencies should mean completely leaving the fiat world. The reality is that the USD is able to maintain stable purchasing power in the short term, unlike cryptocurrencies including ADA. A closer connection between the traditional world of finance and blockchain will be relevant for at least another decade or two. If merchants adopt stablecoins Cardano fans could pay through the USDA or through ADA if they want. There will likely be a service that allows for quick conversion between ADA and USDA when paying in stores. Stablecoins are definitely a good direction.
Conclusion
People are asking what will happen to Djed after EMURGO announced the creation of the USDA. COTI plans to launch Djed in the near future. Djed is an algorithmic stablecoin that differs from USDA in that it does not need to trust a third party. In the case of Djed, there is no need for any third party to hold physical USD in the bank. Only crypto-assets like ADA coins will be used as the underlying asset. The algorithm will be responsible for minting and burning Djed and keeping the underlying asset in the required ratio. The market value of the assets will be obtained from the real world through Oracle services. Some people will prefer to use USDA, others Djed.
All Cardano fans are undoubtedly glad that we will have our own USD-backed stablecoin and not have to rely on tokenized USDT and USDC. This solution has already failed. Many remember the Nomad bridge hack. A native solution is definitely the best we can have. The USDA was a big surprise to everyone and confirms that the Cardano ecosystem is growing despite the bear market.
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