While scouring through the WorkQuest website and Whitepaper, you may have seen something about STABLECOINS. For those familiar with the crypto industry, Stablecoins sounds like a great idea. However, there are a few things to watch out for. Let's explore what they are.
STABLECOINS 💰
A cryptocurrency is typically used as a medium of exchange and not as a store of value. Unfortunately, a low market cap means that prices always fluctuate. Eg. Bitcoin's price. A smaller market cap equals a high level of volatility. Stablecoins were developed to combat this problem. Thus, Stablecoin can be defined as any cryptocurrency pegged to a less volatile asset.
TYPES OF STABLECOINS & FUNCTIONS
Stablecoins have been on the rise but, all are not built the same, however. Stablecoins are classified by their collateral:
🎯 Fiat-backed: Eg. WUSD, USDT, GUSD, USDC, etc. There is a growing interest in USDC among the crypto community because US dollars are directly linked to USDC's value. Reserves are held with regulated U.S. financial institutions in the form of cash and short-term US Treasuries.
🎯 Crypto-backed: Eg. Wrapped Bitcoin (WBTC), WUSD, EOSDT, etc. WUSD, however, is quite popular in the crypto community. As DAO-backed, new WUSDs are not controlled by any central organization.
🎯 Commodity-backed (Gold, Oil) Eg. XAUT, PAXG, etc.
🎯 Algorithmic: Eg. AMPL, DefiDollar, Frax, etc.
PROS & CONS
One may wonder, "So which is the best bet?" Let's take a look at some separately.
💣 Fiat-backed: A coin's value is dependent on the fiat asset that backs it. With this, It is difficult to prove that the company holds the assets it claims to back the Stablecoin, and the capital of the company sits idle.
💣 Crypto-backed: These can be easily Audited on the blockchain. However, this can lead to extremely volatile collateral.
💣 Algorithmic: A smart contract will release/decrease new stablecoins if the price of the coin exceeds/reduces against the original peg of 1 Stablecoin = 1 USD respectively. This strategy has no assets as collateral, only a smart contract. However, there’s skepticism about how this guarantees a price change.
As investors in the crypto community gather more and more information, it's important to diversify portfolios. This allows you to adapt to shocks as they occur. The collapse of Terra UST and LUNA is a recent example. The value of many investors' “Stablecoins" plummeted in an instant.
⚠️Avoid putting all your eggs in one basket. Stablecoins included. In avoidance of such a calamity befalling WorkQuest, the WUSD (WorkQuest’s stablecoin) is pegged to the U.S. dollar and is collateralized by a blend of other cryptocurrencies to maintain its value.
To secure the value of WUSD, monetary values are stored to provide a backup for the value of WUSD. As collateral, you store values equivalent to 1 USD if you have 1 WUSD in your crypto wallet. Ideally, you should be able to exchange WUSD for equivalent values. Pretty simple huh?!
Well, this is what the inner workings are like.
😊So for instance, the User purchases WUSD with any available collateral (USDT, USDC, BNB, ETH, WQT). The percentage of the collateral solely depends on the collateral chosen. This ranges from 103% to 200%. The average value and lower limit of the token are calculated to start liquidation. They are structured as follows. The lower bound for USDT/USDC pools is set at 102% and that for ETH/BNB/WQT pools is set at 150%.
📉In a scenario where the collateral falls to the lower limit, the user is then notified that some more tokens must be added or some WUSD be returned to save the collateral and stabilize the price.
🏷Should the user refuse to do so, and the collateral continues to plummet in value, some of the user's tokens are auctioned. Specifically, the amount required to stabilize the value of the collateral. This auction is open to all users of the WorkQuest platform at a 3% discount. All tokens received from the sale of the liquidated collateral are burned to stabilize the price.
🔔A notification is also sent to the user if the collateral value increases. This allows the user to earn additional WUSD for providing collateral by minting their tokens. It doesn't go without warning the user that they may lose some of their collateral if the price plummets. The system contains no unsecured WUSD. It is because of this that you can tell that WUSD isn't just a fantasy currency.
Considering the efforts put into keeping WUSD's value stable, it would be absurd not to see a continued upward trajectory.
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