With $138.4 billion in market cap, stablecoins constitute an important asset class in the crypto space. A stablecoin is a digital unit aiming to maintain a stable value and usually pegged to a fiat currency, gold, another cryptocurrency, or some other asset. There are three stablecoins coming to PulseChain: CST, USDL, and PXDC, and here we talk about their mechanics, use cases, and benefits to the ecosystem.
What are stablecoins
Stablecoins are a type of cryptocurrency that is designed to have a stable value and is typically pegged to a stable asset, such as a fiat currency (e.g., the US Dollar, the Euro), precious metals, other crypto, or commodities. The main objective of stablecoins is to reduce the price volatility that is commonly associated with traditional cryptocurrencies like Bitcoin, Ethereum, and Pulsechain. This stability makes stablecoins more suitable for everyday transactions, contracts, and as a store of value.
There are several types of stablecoins, each with its own mechanism for maintaining price stability. Some of the most common types include:
These stablecoins are backed 1:1 by reserves of fiat currency, such as the US Dollar, held in a bank account or managed by a trusted custodian. Examples include USDC (USD Coin), Tether (USDT), and TrueUSD (TUSD).
These stablecoins are backed by overcollateralized reserves of other cryptocurrencies, like Ether (ETH) or Bitcoin (BTC), and their stability is managed and maintained by smart contracts. DAI is a well-known example of a crypto-collateralized stablecoin.
Algorithmic stablecoins do not rely on collateral backing. Instead, their supply is algorithmically adjusted to maintain the desired stability. Ampleforth (AMPL) or DAI are examples of algorithmic stablecoins.
These stablecoins are backed by physical assets like precious metals (e.g., gold or silver) or other commodities. The value of the stablecoin is linked to the value of the underlying commodity. PAX Gold (PAXG) or Digix Token (DGX) are the best known examples.
Hybrid stablecoins use a combination of collateralized assets and algorithmic controls to maintain stability. FRAX is one example of a hybrid stablecoin.
So far, the most adopted stablecoins are fiat-backed stablecoins like USDT, USDC, and BUSD. DAI, FRAX, and PAXG follow in their footsteps, but with significantly less volume. The main use cases for stablecoins are the reduction in price volatility.Price stability makes them more suitable for everyday transactions and financial contracts. Traders and investors often use stablecoins as a hedge against market volatility during uncertain times. They convert other tokens to stablecoins, preserving their value, and re-enter the market when volatility decreases. They can take a step back from fast price swings without exiting the blockchain ecosystem completely.
Stablecoins also facilitate interoperability between blockchains by having common value standards. This saves users from making complex conversions. They can be integrated into lending platforms and DEXes, giving users a more predictable medium of exchange and store of value.
CST, USDL, and PXDC stablecoins on PulseChain
PulseChain already has DAI, USDC, or USDT, and now it’s going to have CST and PulseChain native stablecoins like USDL and PXDC.
CST is a 1:1 fiat backed stablecoin brought to PulseChain by Coast. Coast created a fiat on- and off-ramp to PulseChain by finding banking partners and routing payments through the user’s digital account before they land on-chain in the user’s account. The user deposits USD in his digital account, then, in a collateral account, it’s converted to CST stablecoin and sent to the user’s account on Pulsechain. When the user wants to withdraw USD, he needs to burn CST first.
CST gives users a near-instant connection between blockchain and traditional finance, with all the benefits of stablecoins. The banking partner is Prime Trust, and it’s insured by the FDIC in the USA while the CST smart contract is audited.
USDL is an algorythmic stablecoin created by the Liquid Loans team. It’s a stablecoin native to PulseChain, which relies on overcollateralized deposits of Pulse (PLS).
Users lock their PLS and mint USDL to take a loan at 0% interest fee with a collateral ratio as and a timeless repayment schedule.
The Liquid Loans lending protocol has two tokens: USDL and LOAN. USDL is created when PLS deposits are made to a vault. By providing USDL to the stability pool, users earn rewards in the form of LOAN tokens. They can be staked to earn the revenue paid for borrowing or redeeming USDL protocol.
The stability pool is crucial to maintaining system solvency. It uses USDL to repay vaults with low collateral and earns rewards in PLS tokens. Pulse can be redeemed by simply providing 1 USDL for 1 dollar’s worth of PLS.
The protocol is decentralised, governance free and immutable, working on a similar basis as MakerDAO and DAI. Dai stabilises its peg through a peg stability module. The module controls the basked of overcollateralized assets like BTC, ETH, and USDC in a vault.
The advantage of a stablecoin like USDL is its isolation from fiat currency, its trusted parties, and its reliance on the economy of the underlying network. The price oracle takes care of fetching the dollar price, but USDL is not pegged to the dollar itself.
PXDS is another algorythmic stablecoin, but this time it’s backed by the PulseX token, PLSX. It uses a fork of the Liquity protocol. It’s immutable and decentralised.
When users deposit PLSX into a vault, they mint PXDC as a form of loan at a 0% interest rate. Depositing PXDC into a stability pool rewards users with the EARN token.
Staking EARN gives users a pro rata share of the borrowing and redemption fees paid in PXDC and PLSX. 1 PXDC is always exchangeable for 1 USD value of PLSX.
The trick with these protocols is to maintain a high collateral value to avoid getting liquidated quickly. A 110% collateral may be too low, but a high collateral of 1000% can sustain big downside price pressure without the risk of losing the collateral while still earning fees.
Stablecoins are an asset class that brings lots of opportunities for DeFi applications like lending, borrowing, yield farming, and other financial services. They create broad liquidity, which holds value during tumultuous market conditions. As a fiat-backed stablecoin directly connected to the banking system, CST may have lots of success within the PulseChain community, while USDL and PXDC bring lots of utility within and outside their protocols, creating more opportunities.