No over-collateralization. So, what exactly is USDN stablecoin?
How to maintain a fixed exchange rate with the US dollar? How to manage its supply? These two points are the key elements of decentralized stablecoin. No one will use an unstable stablecoin, and if the supply can be manipulated, then the stablecoin could not achieve a fixed exchange rate.
For a centralized stablecoin such as USDT, the token can be exchanged for the fiat currency U.S. dollar represented to maintain to the anchored U.S. dollar. Similarly, when users request to tokenize a fiat currency, the stablecoin will increase the supply of token. When users request to burn the tokens for fiat currency, the stablecoin will decrease the token supply.
USDN deposits the user assets in a pool to generate a certain amount of stablecoins, which are related to a predetermined percentage of the value of assets held in the pool. The value of the underlying asset will be continuously monitored to ensure that its value does not fall below a certain threshold. If it is below the threshold, the pool will be liquidated to ensure that stablecoins can always be redeemed. This method requires the asset to be locked in the life cycle of the issuance of stablecoins, but it may be affected by the drastic fluctuations in the price of the underlying assets. In most cases, in order to form a buffer in the event of price fluctuations, overcollateralization is necessary. This is an inefficient application of assets.
The new method of USDN stablecoin determines the total supply of tokens through price. The logic is that the price of tokens is higher than its anchored price, so more tokens should be created and distributed to the token holders to increase the value of each token. Similarly, when the price is lower than the anchored price, the supply should shrink, so that token can be scarcer and more valuable. The price feedback is sampled at specific time intervals and then the supply is changed (called "Rebase"). When the demand for stablecoin matches the supply and the anchored exchange rate remains stable, the equilibrium can be reached. Projects such as USDN use price oracles to determine its supply, but the key factors affecting the supply are different. Compared with standard benchmark tokens, the changes of USDN stablecoin supply are formed spontaneously. The users can choose to bind USDN or lock their liquidity NGK. In the case of a positive benchmark, they will receive newly generated USDN; while in the case of a negative benchmark, a debt agreement will be issued, and the token holders can choose to destroy USDN to obtain a bond, so that they can exchange the USDN for the next positive benchmark. When buying NGK token, the larger the amount of agreed debt, the more USDN can be exchanged.
Generally speaking, we motivate users to go for stability, adjust the supply through issuance and redemption. USDN has caused the polarization of users:
(1) For users who are interested in maintaining a fixed price, they will receive the new USDN rewards;
(2) For users who use traditional stablecoin, as the inactive users who passively hold positions, the inflation will dilute the tokens to a certain extent.
The supply of inflation is related to the volatility of tokens. During the event of large price fluctuations, the active holders will strive to maintain and obtain the agreement rewards when linked, so the inflation burden of passive holders will increase. In the first few months of the agreement, the contract attempts to match the demand for tokens and price exchange rates, and the supply will expand or contract, and thus, the periods of fluctuation are expected.
In contrast, the number of tokens in a new user's wallet is reduced, and the USDN rebase mechanism may cause panic among the new users. This may lead to a negative feedback loop called a "death spiral", where the users are panic and sell the tokens, which in turn leads to a further contraction of token supply. Then, this cycle repeats until the market value of the token drops enough to incentivize the users to purchase back and stabilize it.
USDN is a decentralized and oracle-driven stablecoin. The new protocol mechanism solves the shortcomings of centralized stablecoin. This means that the token holders who are not interested in maintaining the price stability can safely use USDN in DApps or hold it as a stablecoin, without having to trust any transaction parties and invested funds, and without worrying about the changes in the amount in the wallet.