The problem with dollar pegged stable coins.
Lets be honest , we part most the juicy gains we made from crypto in stable coins if we haven't converted it into fiat currencies.
There are inherent risks in these dollar pegged stable coins.Some of these stable coins may not be audited and not backed by actual US dollar as they claim to be. Regulatory risks can also come into play like STABLE Act(which is currently just a proposal) which could disrupt the entire crypto economy.
Stable coins which are independent of fiat currencies
Those who have studied economics might have come across the “impossible trinity” which states that its impossible for an economy to have all three of:
1.A fixed exchange rate
2. Free capital movement
3. Sovereign monetary policy
Any monetary policy can only have two of these three pillars. Stable coins which are pegged to US dollar have fixed exchange rate and free capital flow , but sacrifices sovereign monetary policy.
Algorithmic stable coins turns away from fixed exchange rate in favor of sovereign monetary policy , which is key in avoiding regulatory risks.
ARTH Stable coin
ARTH pegging
Unlike traditional stable coins ARTH is pegged to GMU (Global Measurement Unit).GMU comprises of three things.
- A global collection of Fiat Currencies(80%)
- Gold
- Bitcoin
The collection of fiat currencies includes a bunch of currencies ,which GDP is contributed to 2% of the worlds total GDP, from year 2011 to 2019.The swiz franc is taken into consideration as investors sees it as a safe moon.
Gold and bitcoin can play a vital role as a hedge against inflation , so its ideal to give it a 20% allocation all together.
Current temporal target price of ARTH is 1USD and later it will pegged according to GMU.
When ARTH is trading above the target price (1$), arbitrageurs will buyI ARTHX to mint ARTH and sell the ARTH in the open market to realize a profit. Hence, bringing the price of ARTH down to the 1$ mark.?When ARTH is trading below the GMU (1$), arbitrageurs will purchase ARTH from the open market and then redeem/burn the ARTH to get back the underlying collateral along with some ARTHX which is sold off in the market to realize a profit. Hence increasing the supply of ARTH to meet the actual demand for it.
In layman language let say you deposit 100$ worth of collateral to the pool.Then the pool will give you back 90$ worth of ARTH and 10$ worth of ARTHX. This system is over collateralised ,which will prevent it from bank run. Same goes for getting you collateral back, provide the 90$ worth of ARTH and 10$ worth of ARTHX and you are good to go.
ARTHX is also designed as a deflationary token as for each transfers of ARTHX , there will 10% fees which will be divided as, 5% back to stakers and 5% as token burn.
Holding ARTHX will give multitude of benefits including buyback, and also staking fees will be distributed if you stake ARTHX in the platform.
End of Part I
Originally published in gutwhowrites medium.com handle.
