A New Look at Asset-Backed Stablecoins

stablecoins

Especially during turbulent times, stablecoins are becoming a very important part of the overall crypto asset ecosystem. While the prices of tokens on exchanges have a tendency to fluctuate wildly (and often in a highly correlated manner), stablecoins are designed to keep a steady store of value, allowing crypto traders and investors to mitigate risk and escape market volatility when a sudden drop hits the whole market or to lock-in gains as the bears eat everyone’s portfolio piece by piece. How do stablecoins manage to stay a calm island within the raging market seas? It’s not as complicated as you may think.

Under a traditional valuation model, an asset’s price on a market is determined by two factors: its inner value (how useful it is in the real world), and its potential of becoming more useful or generating more profit for the investors. This combination is always reevaluated by the market, and that gives us volatility. Stablecoins operate differently, because the whole point of their existence is to maintain a steady store of value.

While some stablecoins maintain stability strictly algorithmically (there’s nothing backing them), many of the most promising projects are pegged to the price of an asset and – in the best case scenario – are actually redeemable and backed by that asset.

Take the case of a token pegged to the dollar and redeemable for dollars, for example – TrueUSD and USD Anchor both implement this approach. Because the pegged price of the coin is equal to 1 US dollar and the token is redeemable for a dollar, were the value of the token to drop below that price any smart investor could buy and sell it for 1 dollar on the open market or they would redeem it directly through the issuer, profiting from the simple arbitrage opportunity that existed in the open market.

This is the simplest case, because the price of the token is pegged to the value of the asset backing the token. However, in such a model, the centralized nature of the project requires a lot of faith in both the actors involved and the institutions storing and regulating their operations. To build trust among its token holders, reputable companies can allow their funds to be audited systematically in order to ensure that the claimed collateral does exist. But this alone doesn’t eliminate the risk that things could change in the future, and underlying assets could be mismanaged or face seizure/other issues in a rapidly shifting environment.

In any case, the more crypto asset markets grow and attract new capital,  the more room there is for stablecoins – specifically those that appeal to the more risk-averse investors sitting on the sidelines. Currently, there are more than a dozen stablecoins already developed, and there are a lot more in development, but if recent capital increases are any indication, the market is clearly hungry for more. One such promising project is USDVault.

A new gold-backed, redeemable, 1:1 USD-pegged stablecoin

Vault, the Canadian-Swiss smart-contract platform, recently announced its partnership with the blockchain-driven trust company Prime Trust. Under the partnership, Prime Trust will act as a fiduciary and custodian of the LBMA gold bullion behind Vault’s gold-backed and redeemable, 1:1 USD-pegged stablecoin, USDVault, which will launch in Fall 2018.

vault

The new partnership positions Vault’s USDVault token as a viable alternative to market-leading fiat-backed stablecoins, and it also signals Prime Trust’s first move into the world of precious metals – a move that bridges the two asset classes that have a special appeal to investors seeking opportunities outside the conventional markets.

Vault is backed by a consortium of precious metals focused on private equity funds, explorers, miners, and refiners. The company’s upcoming USDVault token is ERC20 compliant and issued on the Ethereum blockchain. It also acts as an “evidence of a deposit,” giving investors the ability to redeem the tokens for $1 USD or its equivalent in gold. It is able to remain gold-price neutral and stay pegged at 1:1 to the US dollar through a sophisticated gold-hedging process that is to be executed by Vault’s precious metals partners.

Under the partnership, Prime Trust will act as the fiduciary partner and custodian for all assets related to Vault’s USDVault token. After passing KYC/AML compliance checks, token buyers will transfer funds to Prime Trust, which is then responsible for executing the operational protocol provided by the Vault Platform. This includes the purchase of gold bullion and a specific hedge with Vault’s designated financial partners to maintain price stability vis-a-vis the US dollar. All transportation and storage of the gold bullion will be conducted by a fully insured vaulting company in Switzerland.

“Together, Vault and Prime Trust will offer cryptocurrency investors something previously unheard of – a secure, investment-worthy stablecoin that gives token holders a legal claim to the USD equivalent worth of gold or fiat currency,” says Vault CEO and Co-founder, Ranjeet Sodhi. “Leveraging our respective strengths, we hope to provide the gold standard of stablecoins for institutional investors.”

Conclusion

The market still needs better, more sophisticated stablecoins that meet the needs of more discerning investors. The whole market turnover for Tether is 1.5x bigger than its supply on a daily basis – recently hitting $4.2 billion in trading volume versus a  $2.76 billion circulating supply. Especially in times of market uncertainty, the demand for stability is high, and more and more investors are looking beyond Tether for a reliable stablecoin option.

USDVault combines the stability of a 1:1 USD-pegged price with the security of having LBMA-grade gold bullion stored in insured vaults in Switzerland. Will they be successful? Will the market accept this idea? We can’t say with certainty, but with Vault rapidly approaching their launch date in the fall and forging solid partnerships for all levels of its operations, the project is certainly positioning itself to compete favorably amongst the major players in this space. Looks like we’ll find out when autumn comes.

All materials on this site are for informational purposes only. None of the material should be interpreted as investment advice.

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