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Stablecoin giant Tether unveiled a new stablecoin on Monday which, much like USDT, is designed to track the price of the U.S. dollar.
Unlike the pre-existing USDT token, however, the newborn “Alloy” (aUSDT) token will be backed by overcollateralized gold reserves rather than government debt.
“aUSDT unifies the most popular currency in the world with the store of value used by humanity for the last 5,000 years,” wrote Tether on Twitter.
3/ In the case of Alloy by Tether, aUSD₮ is over-collateralised by XAU₮ and its price stability is maintained through supply/demand dynamics on secondary markets (including liquidity pools). pic.twitter.com/RSiXbGZ2UB
— Alloy by Tether (@Alloy_tether) June 17, 2024
On the company’s website, Tether championed the “historical strength of gold-backed currencies” while crediting the gold standard of old to reduced inflation, enhanced global commerce, and steady economic growth.
Technically speaking, aUSDT is backed overcollateralized by Tether Gold (XAUT), a pre-existing Tether stablecoin that is both backed by and price pegged 1:1 with one troy ounce of gold each. That token currently boasts a $574 million market cap, and is currently the largest gold-backed token, with Paxful’s PAXG a close second at $428 million.
Being “overcollateralized” means aUSDT is backed by value exceeding that of the number of its tokens in circulation. This provides a buffer against price drawdowns of gold which, if large enough, could cause the token to lose its dollar peg.
Overcollateralization is just one scheme among many for creating dollar-pegged stablecoins with differing features and security tradeoffs.
Tether’s USDT token, by contrast, uses a large reserve of cash and short-term U.S. T-bills to back the token, on which the interest paid on the bills generates the bulk of Tether’s profits. USDT is also overcollateralized with an additional $3.7 billion in gold and $5.4 billion in Bitcoin, according to the firm’s Q1 figures.
There are also crypto-native solutions. Ethena (USDe) uses a delta-hedging strategy between Bitcoin and Ethereum’s spot and futures markets to maintain a value-stable portfolio that also promises token holders a small yield. The less widely known Sovryn Dollar (DLLR) maintains its peg through overcollateralized Bitcoin loans.
As things stand, the most popular stablecoins are those backed by government debt—and U.S. politicians are bullish on tokens that use such a model. In a Wall Street Journal article on Friday, former House Speaker Paul Ryan wrote that such stablecoins could “stave off a U.S. debt crisis.”
Edited by Andrew Hayward