Stablecoins are an essential part of the rise of cryptocurrencies. They provide a stable asset for investors to hold their value until they’re ready to dabble in the volatile market. The fiasco regarding Luna and UST only served to show the growing role of stablecoin.
UST lost its peg, crashing to less than 20 cents. This was remarkable for a token designed to hold its value of $1 and brought about questions regarding the viability of algorithmic stablecoins as an alternative to paper-backed stablecoins like USDC, BUSD and USDT.
Algorithmic stablecoins, when designed properly, provide the ideal form of stablecoins as they are decentralized and crypto-backed. For example, Terra developed a system that maintained the value of UST to the dollar by incentivizing users to exchange between Luna via a burning mechanism.
However, the fall of UST has brought about major concerns in these forms of stablecoins as the delicate arbitrage system deployed by Terra failed. As a result, a search has begun for the best working decentralized and algorithmic stablecoin. SigmaUSD, a stablecoin protocol on the Ergo blockchain, provides an excellent alternative for users to reserve value.
A truly decentralized stablecoin built on sustainable tokenomics
SigmaUSD is the native stablecoin of the Ergo blockchain and has been designed to be truly decentralized and sustainable. Firstly, the stablecoin is entirely on-chain and non-custodial. This means that a team of developers does not control it and there is no sole representative like in the case of UST.
The entire control of the stablecoin is encoded on a smart contract and recorded on the blockchain. Therefore, it is an entirely trustless system that is tamper-proof and prevents backdoor manipulation.
Unlike UST, SigmaUSD is crypto backed and has a reserve pool that maintains its value. The pool has two funding sources, people trading ERG tokens for SigUSD and people exchanging ERG for the reserve token, SigRSV. This mechanism ensures that the pool is well equipped and funded to maintain the peg of SigmaUSD to the dollar.
The pool is also designed to ensure over-collateralization of SigmaUSD and absorb the volatility of ERG. This ensures that most of the risk is placed on SigRSV holders, thus ensuring the stability of SigmaUSD.
SigmaUSD is also coded using an algorithm that ensures that the stablecoin is over-collateralized by 400% and 800%. These rules are coded in the smart contract and are an effective means of maintaining the dollar peg. This is achieved by allowing users to mint SigUSD when the reserve ratio is above 400% and SigRSV when it is below the reserve ratio.
This balance is maintained by the smart contract that calculates the value of SigRSV by auditing the total number of ERG in reserve and in circulation. Thus the risk of market volatility shifts to SigRSV holders as they can only redeem their tokens when the reserve ratio is above 400%. In contrast, SigmaUSD holders can redeem their assets at any time.
SigmaUSD has stood the test of time
SigmaUSD is fundamentally different from existing stablecoins and has maintained its $1 peg continuously, unlike the UST token that was tied to the supply and value of the Luna token. SigUSD is over-collateralized by a minimum of 400%, and holders can verify the reserves ratio on the blockchain at any time.
Unlike paper-backed stablecoins that have to deposit their reserves with centralized financial institutions, SigmaUSD stays true to the ideals of cryptocurrency – putting power into the hands of holders instead of institutions.
SigmaUSD has also been able to back its promise by constantly maintaining its peg. This is despite the fact that the value of ERG has swung widely during the last year from an all-time high of $19 to a low of $2. During this period, the price of SigUSD has maintained its $1 peg and has never dipped.
SigmaUSD has also taken its place as a centrepiece of Ergo, as the blockchain continues to develop into a robust, secure and open source protocol for individuals and organizations to build on. Following the UST — Luna fiasco, SigmaUSD looks poised to become the stablecoin that the crypto industry needs.