Tether, a prominent stablecoin issuer, has introduced a new product called Alloy, a gold backed stablecoin, with its first token being ‘aUSD₮’.
The Tether stablecoin Alloy designed to stabilize prices by collateralizing users’ assets with Tether Gold (XAU₮).
Gold has been a trusted store of value for centuries. By tokenizing gold, Tether allows users to benefit from the stability of gold while enjoying the flexibility and speed of cryptocurrency transactions. It is a modern way to invest in gold without the hassles of physical ownership.
In a nutshell, Tether Gold is an innovative way to merge the old-world reliability of gold with the new-world convenience of blockchain technology.
What is Tether’s gold-backed stablecoin?
Tether’s gold-backed stablecoin, known as Tether Gold (XAUT), is a digital asset that represents ownership of physical gold. Each XAUT token is backed by one troy ounce of gold, securely stored in Swiss vaults.
- Stability: Unlike traditional cryptocurrencies, XAUT aims to provide the stability and value preservation of gold, making it less volatile.
- Accessibility: Owning gold through XAUT is more accessible and convenient, eliminating the need to store or transport gold physically.
- Transparency: Tether provides regular updates and transparency reports about the gold reserves backing XAUT, ensuring users can trust the backing of each token.
Key Features and Mechanisms
1. Collateralization with Tether Gold (XAU₮)
Alloy tokens (aUSD₮) are minted by depositing Tether Gold into smart contracts. Each aUSD₮ is pegged to the U.S. dollar but backed by gold, combining the dollar’s stability with the value-preserving characteristics of gold.
This over collateralization ensures that the value of aUSD₮ remains stable even during market fluctuations.
2. Ethereum-Based Vault System
Alloy uses Ethereum-compatible smart contracts known as Vaults to mint and manage aUSD₮. These smart contracts store users’ collateral, unissued aUSD₮, and collateralized minted positions (CMP).
Only verified addresses, that have completed KYC checks, can interact with these vaults, ensuring a secure and compliant environment.
3. Liquidation Mechanism
If the value of the collateral falls below a certain threshold (75%), authorized liquidators can reclaim the user’s Tether Gold and return a corresponding amount of aUSD₮.
This process helps maintain system integrity and prevents under-collateralization.
4. Fees
The system charges several types of fees:
- Minting fee: 25 basis points (bps) for each newly minted aUSD₮.
- Return fee: 25 bps when redeeming aUSD₮ for its underlying collateral.
- Liquidation fee: 75 bps for liquidators during the liquidation of XAU₮.
Advantages of aUSD₮
1. Stability and Security
Alloy offers a unique blend of the U.S. dollar’s stability and gold’s intrinsic value. This combination reduces volatility and provides a reliable store of value, making it an attractive option for both individual and institutional investors.
2. Transparency and Trust
Based on the Ethereum blockchain, Alloy utilizes auditable smart contracts for transparent minting and redemption processes. The over-collateralization model further ensures that aUSD₮ remains a secure investment option.
3. Yield Generation
The over-collateralization allows for potential yield generation, enhancing the attractiveness of aUSD₮ for investors seeking both stability and returns.
How to Acquire Alloy (aUSD₮)
Similar to other cryptocurrencies, one can trade Alloy (aUSD₮) through these two methods.
1. Minting aUSD₮
Users can obtain Alloy (aUSD₮) by depositing Tether Gold (XAU₮) into the Alloy smart contract. Here’s how the process works:
- Depositing XAU₮: Users transfer their Tether Gold to the smart contract associated with aUSD₮.
- Minting Process: The smart contract verifies the deposit and mints a corresponding amount of aUSD₮, which is then issued directly to the user’s wallet address.
- Minting Fees: A minting fee of 25 basis points (bps) is charged on each newly minted aUSD₮, which translates to 0.25% of the total minted amount.
2. Trading on Exchanges
- Centralized Exchanges: aUSD₮ can be traded on centralized exchanges like Bitfinex. Users can purchase or sell aUSD₮ similarly to other cryptocurrencies.
- Decentralized Exchanges (DEXs): aUSD₮ is also available on decentralized exchanges. This provides users with the flexibility to trade without the need for an intermediary, ensuring a higher degree of privacy and control over their assets.
Different Ways to Acquire aUSD₮
1. Transferring Tether Gold (XAU₮)
Smart Contract Interaction: Users interact with the Alloy smart contract by transferring XAU₮. The smart contract then mints and issues aUSD₮ directly to their wallet.
2. Secondary Market Trading
- Centralized Exchanges: Platforms like Bitfinex facilitate the trading of aUSD₮ against various fiat and cryptocurrency pairs.
- Decentralized Exchanges (DEXs): Users can trade aUSD₮ on DEXs, providing a decentralized, peer-to-peer trading environment.
Fee Structure for aUSD₮ Transactions
1. Mint Fee
- The fee is charged when new aUSD₮ tokens are created.
- Current Rate: 25 basis points (bps) or 0.25% of the total amount minted.
2. Return Fee
- The fee paid by users when redeeming aUSD₮ tokens for their underlying collateral (XAU₮).
- Current Rate: 25 basis points (bps) on each aUSD₮ returned.
3. Liquidation Fee
- A fee is incurred when the collateralized position’s value falls below a specific threshold, triggering liquidation.
- 75 basis points (bps) for liquidators, equivalent to 0.75% of the value of the liquidated XAU₮. This fee helps cover operational costs associated with the liquidation process.
4. Liquidation Premium
- To incentivize liquidators to maintain system solvency, liquidated XAU₮ is offered at a discount.
- Unlike the liquidation fee, which is paid by the liquidator to the platform, the premium is a discount on the collateral’s value during liquidation.
Acquiring Alloy (aUSD₮) involves either minting the tokens by depositing Tether Gold (XAU₮) or purchasing them on exchanges. The fee structure, including minting, returning, and liquidation fees, is designed to ensure the stability and security of the Alloy ecosystem. These mechanisms make aUSD₮ a robust and attractive option for investors seeking a stable, gold-backed digital asset.
Comparisons with Other Tether Products
- Tether (USDT): Pegged to the U.S. dollar, designed for everyday transactions.
- Tether Gold (XAU₮): Represents ownership of one troy ounce of physical gold, suitable for those seeking direct gold exposure.
- Alloy (aUSD₮): Combines the dollar’s stability with gold’s security, offering a hybrid asset for diversified investment portfolios.
Conclusion
Tether’s Alloy (aUSD₮) introduces an innovative approach to stablecoins, leveraging the strengths of both the U.S. dollar and gold.
With robust security measures, transparent operations, and the potential for yield generation, aUSD₮ offers an attractive option for those looking to diversify their digital asset portfolios.
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