What is aUSDT? A First Look

aUSDT is a new “tethered” digital asset that combines the stability of gold with the functionalities of a Web3-based digital asset. It introduces the concept of a “Tethered Asset”, which is backed by Tether Gold (XAUt), representing ownership of physical gold stored in Switzerland. The aUSDT token is designed to track the value of the US Dollar through over-collateralisation and secondary market liquidity pools, which provide stability and mitigating market fluctuations. Users can mint aUSDT by depositing XAUt into Ethereum-compatible smart contracts, which automate and secure the collateral management process, thereby providing a reliable and stable digital currency option.

A New Kind of Tethered Digital Asset

aUSDT is an innovative new foray into the realm of digital assets by combining the stability of gold with the functionalities of decentralised digital assets. aUSDT introduces a new kind of  “Tethered Asset” which is designed to maintain a stable value by tracking a specific reference asset, such as the US Dollar, through mechanisms like over-collateralization and secondary market liquidity pools. Over-collateralisation seeks to ensure that more value is held as collateral than the value of the assets issued, providing a safety net against market fluctuations and enhancing the asset’s stability.

The first asset within the Alloy by Tether ecosystem is aUSDT, a digital asset minted using Tether Gold (XAUt) as collateral. Tether Gold represents ownership of physical gold stored securely in Switzerland, offering the reliability of gold’s historical value preservation. Users can mint aUSDT by depositing XAUt into smart contracts, which then hold the collateral and allow minting of aUSDT. This process, combined with the activity of liquidators and secondary markets, helps ensure that aUSDT remains closely tied to the value of the US Dollar, providing users with a stable digital currency that incorporates gold’s benefits of scarcity and low volatility.

One of the critical features of aUSDT is its use of smart contracts, which are designed to be Ethereum Virtual Machine (EVM) compatible. These contracts are written in Solidity, a robust and secure programming language for Ethereum smart contract development. The smart contracts enable automated, transparent, and immutable execution of transactions, ensuring that all interactions with aUSDT’s assets are secure and verifiable. This technology forms the backbone of the system, allowing users to mint, manage, and return their Tethered Assets seamlessly.

aUSDT’s smart contract stores user collateral and unissued aUSDt. It also tracks and manages information related to the user’s particular Collateralized Minted Position (CMP) in what are called “Vaults”. The smart contract uses pricing information from a price oracle to recalculate and adjust each user’s CMP based on the collateral’s value reported by the price oracle. If the collateral’s value drops below a certain threshold, the system triggers liquidation processes managed by specialised actors known as liquidators. This mechanism helps maintain the collateralisation ratio, helping preserve the stability and reliability of the minted aUSDT. Through this sophisticated system, aUSDT aims to offer a stable and secure digital asset that bridges the traditional value of gold with modern digital currency functionalities.

How Does aUSDT Work Under the Hood? 

Issued by MoonGold El Salvador, S.A. de C.V. and MoonGold NA, S.A. de C.V. (the “Issuers”), aUSDT operates through a sophisticated system designed to combine the stability of gold with the technological advantages of digital assets. Users start by depositing Tether Gold (XAUt) tokens, which represent ownership of physical gold stored in a Swiss vault, into a smart contract. This forms the basis for creating the Tethered Asset, aUSDT. The system requires that more value in XAUt be deposited than the amount of aUSDT minted. The system will not allow users to mint aUSDT worth more than 75% of the value of the XAUt deposited. If the value of the aUSDT minted (and not returned) exceeds 75% of the value of the XAUt collateral, the liquidation process described above occurs. This excess collateral acts as a buffer against market volatility, helping ensure the stability of the aUSDT tokens.

Written in Solidity, aUSDT’s Ethereum-compatible contracts manage the entire process, from collateral deposit to minting, returning aUSDT and supporting liquidation by the liquidators. They ensure automated, transparent, and secure execution of transactions. These are specialised smart contracts that store user collateral, track the minted and returned aUSDT, and manage the collateralized minted positions (CMPs) of each user. Each Vault can only interact with one verified address, which must be white listed to interact with the smart contract, helping the Issuers comply with KYC (Know Your Customer) obligations.

Once the collateral is deposited, users can mint aUSDT, which is pegged to the US Dollar. The amount of aUSDT minted depends on the users’s preference (up to a maximum collateralisation ratio of 75% set by the system). Users can monitor their CMPs through a user-friendly frontend interface, checking metrics like collateral amount, minted aUSDT, liquidation point, and health bar. This helps users manage their positions effectively and, by doing so, avoid liquidation.

The system uses a price oracle to determine the value of XAUt. The price oracle values each aUSDT at 1 USD. This oracle provides real-time pricing data, which the smart contracts use to adjust collateral values and CMPs. This design allows for arbitrage. If aUSDT trades below or above 1 USD in the market, users can exploit these discrepancies by minting or returning aUSDT to the smart contract, which values those aUSDT at 1 USD, and then buying or selling aUSDt  in the market where the value of aUSDT is below or above 1 USD. This mechanism helps keep the price stable.

If the value of the collateral drops and the CMP exceeds a set liquidation point (75% Mint-To-Value), the position becomes eligible for liquidation. Specialised actors called liquidators can step in to buy the collateral at a discount using aUSDT, thus restoring the collateralisation ratio and maintaining the system’s stability. Liquidators return aUSDT to the Vault of the user who is being liquidated to claim their XAUt collateral at a discount to the price for XAUt reported by the price oracle, which incentivises liquidators to act and helps ensure that aUSDT is backed by an overcollateralization of XAUt.

The use of Ethereum’s robust blockchain technology helps ensure that all transactions are secure, transparent, and immutable. Since everything is on-chain, all transactions and collateral values can be independently verified, promoting a high level of transparency and trust in the system. aUSDT aims to offer a stable, reliable digital asset that mitigates the risks associated with market volatility and provides users with a dependable store of value.

The Need for a New Safe Haven Asset

aUSDT offers a stable and reliable digital asset solution by leveraging Tether Gold (XAUt) to mint aUSDT. The system is designed to maintain price stability and provide a dependable store of value, which is particularly useful for users seeking a stable digital currency for various financial activities. By blending the enduring value of gold with modern digital asset technology, aUSDT provides a stable and versatile digital asset that can be used for various financial activities while providing price stability through the robust collateral and smart contract mechanisms described above.

Users can leverage aUSDT for everyday payments and transactions. The backing by Tether Gold (XAUt) helps the value of aUSDT remain steady, mitigating the volatility often associated with other cryptocurrencies. This stability makes aUSDT a useful digital currency for purchasing goods and services, as users can expect that the value of their holdings will not fluctuate wildly between the time of acquisition and the point of transaction. Additionally, the peg to the US Dollar facilitates straightforward pricing and conversion, making it easier for merchants and consumers to adopt and utilise aUSDT in daily financial activities.

In periods of economic uncertainty and market volatility, aUSDT aims to serve as a reliable store of value, merging the stability of gold with the operational benefits of digital currency. Users seeking to protect their assets from market downturns can turn to aUSDT for its ability to preserve value thanks to its gold backing. 

Arbitrage traders can take advantage of price discrepancies in aUSDT and contribute to aUSDT’s price stability. When the market price of aUSDT falls below its peg of 1 USD, traders can buy the asset at the lower price and use it to free up collateral in their Vault, thus benefiting from the price differential. Conversely, if aUSDT trades above 1 USD, traders can mint new aUSDT and sell it at the higher market price, increasing the supply and driving the price back down towards the peg. These arbitrage activities not only provide opportunities for traders but also help maintain the price stability of aUSDT, helping ensure it remains a reliable and stable asset.

For users holding XAUt as collateral, aUSDT offers efficient collateral management and liquidity options. By depositing XAUt into the system, users can mint aUSDT, which can then be used for various financial purposes without the need to sell their XAUt and can be returned to the smart contract at any time. This flexibility allows users to manage their CMPs effectively, adjusting their collateral and minted assets as market conditions change. Furthermore, the ability to return aUSDT to reclaim collateral ensures that users can respond swiftly to shifts in asset values, maintaining their own personal collateralisation ratio and managing the risk of liquidation. This seamless integration of gold-backed stability with digital currency functionality makes aUSDT a powerful tool for users.

Important Note:

This post is not an offer to sell or the solicitation of an offer to buy Alloy by Tether (aUSDT) tokens or any other cryptocurrency.  Any purchase or sale of any cryptocurrency on Bitfinex will occur solely pursuant to the Terms of Use for Bitfinex at https://www.bitfinex.com/legal/exchange/terms. 

The post What is aUSDT? A First Look appeared first on Bitfinex blog.