Exploring Tether's Alloy: Combining Gold's Stability with U.S. Dollar's Reliability
Summary:
Tethered assets are adaptable tokens designed to track the price of diverse assets. This flexibility makes them suitable for mimicking the price of commodities, fiat currencies, and other financial instruments. Among these assets, Tether (USDT) is pegged 1:1 with the US dollar. One notable innovation by Tether is Alloy (aUSD₮), a token pegged to the US dollar and collateralized by Tether Gold (XAU₮) on a smart contract basis. This combination of gold's stability with the US dollar’s reliability allows Alloy to reduce the high volatility generally associated with cryptocurrencies. Alloy functioning entirely on-chain, offers an alternative to the traditional banking system, providing investors with stability, diversity and passive yield generation opportunities.
Digital tokens referred to as tethered assets are adaptable in nature and are crafted to follow the price of different basis assets such as the US dollar. Also known as stablecoins, they are underpinned by diverse types of security including gold, different government-issued currencies, or a diverse range of multiple assets, providing added adaptability and options for risk management. Such flexibility allows tethered assets to mirror the price of a broad spectrum of assets such as primary fiat currencies like the US dollar or euro, commodities like gold, oil and wheat, or other financial instruments such as stocks or bonds. To maintain their link to the underlying asset, tethered assets use several mechanisms, frequently amalgamating over-collateralization with strong liquidity pools on secondary markets. By holding reserves that exceed the value of the issued assets and guaranteeing smooth trading on secondary platforms, these mechanisms aim to stabilize the value of the tethered asset and keep it closely aligned with its reference asset.
A familiar example of a tethered asset is Tether (USDT), which asserts that its reserves are equivalent to the amount of USDT in circulation, aiming to maintain a 1:1 link with the U.S. dollar. Despite its success, Tether has come under examination and faced regulatory challenges due to instances of depegging. To contend with these issues, Tether frequently undergoes independent evaluations to confirm its reserves in response to regulatory investigation. For instance, in April 2024, Tether successfully finished a System and Organizational Controls 2 (SOC) audit, representing the highest level of security compliance. Furthermore, it periodically releases reports detailing its reserves and asset combination to augment the clarity of its activities.
Alloy (aUSD₮) by Tether, is established using EVM-compatible smart contracts and takes advantage of the stability of Tether Gold (XAU₮), a digital representation of physical gold. AUSD₮ is Tether’s first Alloy developed to mirror the U.S. dollar using Tether Gold as securitization. It is established using Ethereum Virtual Machine (EVM)-compatible smart contracts, which enable smooth interoperability and integration within the wider Ethereum ecosystem and its various compatible blockchains.
Tether Gold (XAU₮) is employed as the collateral for Alloy by Tether, which positions itself as a digital asset anchored to the stability and scarcity of gold, a long-established asset known for its low volatility. Using the Ethereum blockchain, XAU₮ is an ERC-20 token equivalent to one troy ounce (31.1 grams) of physical gold. Each XAU₮-holding blockchain address is linked to actual gold stored in a Swiss vault on behalf of Tether Gold's token holders.
Alloy by Tether is not licensed in any jurisdiction as an entity. However, Moon Gold NA, S.A. de C.V., and Moon Gold El Salvador, S.A. de C.V., are authorized by the National Commission of Digital Assets (CNAD) in El Salvador to handle the issuance and management of aUSD₮.
Users can interact with Alloy by Tether's smart contracts through its user-friendly web portal where they can mint and redeem aUSD₮ using XAU₮. Users can visit the website alloy.tether.to for more information. Technically skilled individuals can interact directly with the smart contracts using specialized tools. It is important to note that only Ethereum addresses that have been verified and clears Know Your Customer (KYC) checks can interact with these smart contracts. Further information can be obtained on Alloy by Tether's front-end documentation.
AUSD₮ combines U.S. dollar's stability with gold's value-preserving characteristics, serving as a stable value measure. AUSD₮'s functionality is based on three overall principles of over-collateralization, vaults and liquidation mechanisms:
Over-collateralization: AUSD₮ tokens are backed by a larger value of Tether Gold (XAU₮) than its face value. This surplus XAU₮ acts as a buffer, protecting the stability of aUSD₮ against potential gold price fluctuation.
Alloy by Tether Vaults: Ethereum compatible core smart contracts called Vaults are used to mint and manage aUSD₮. Vaults are multi-task in aUSD₮ ecosystem: storing users' collateral, unissued aUSD₮, users' collaterized minted position information and address metrics such as minted aUSD₮, provided XAU₮ and the position's mint-to-value (MTV) ratio. Only addresses that have gone through a KYC verification process can interact with the vaults and mint aUSD₮.
Liquidation of Collateral: Liquidation occurs when the collateral backing a minted amount drops below a pre-set threshold. If a position gets close to its liquidation threshold, authorized liquidators step in to liquidate the position, returning aUSD₮ up to the minted amount.
Users can get aUSD₮ by depositing XAU₮ to the aUSD₮ smart contract or trading it on exchanges like Bitfinex. Fees apply for minting, returning and liquidating aUSD₮.
AUSD₮, secured by Tether Gold (XAU₮), offers a unique investment opportunity. The U.S. dollar peg and the inherent value of gold stabilize the stablecoin. This unique combination minimizes volatility commonly associated with cryptocurrencies by providing a reliable reserve of value.
USDT is a stablecoin linked to the U.S. dollar; XAU₮, is a gold-backed token equivalent to one troy ounce of physical gold and aUSD₮ is a stablecoin pegged to the U.S. dollar but secured by Tether Gold (XAU₮).
Users can get back their deposited XAU₮ by requesting a withdrawal. However, it's crucial that the MTV ratio stays below 75% (liquidation point) to avoid denial of the request. To successfully recover all deposited XAU₮, users must return the entire minted amount of aUSD₮ they minted. This may require buying back some aUSD₮ on the secondary market to offset the deficit and successfully complete the withdrawal process.
Published At
6/21/2024 2:39:00 PM
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