Cake Pockets added the decentralized stablecoin dEURO to its choices on Tuesday, increasing its steady of euro-denominated digital belongings for customers.
The decentralized stablecoin is overcollateralized by different digital belongings, together with Bitcoin (BTC), Ether (ETH) and Monero (XMR), which means that to mint the dEURO stablecoin, customers should first deposit different cryptocurrencies as collateral.
Overcollateralizing, or depositing cryptocurrency value greater than the worth of the asset being borrowed, acts as a defend in opposition to de-pegging occasions, the dEURO workforce informed Cointelegraph. The dEURO providing additionally options automated liquidations, which happen when loan-to-value ratios drop beneath a sure threshold.
Cake Pockets says customers can earn 10% yield from crypto holdings backing the stablecoin, with out giving up custody of their funds. The yield is generated from stability charges paid by depositors minting the stablecoin and deposited into an fairness reserve pool, a dEURO spokesperson informed Cointelegraph.
This helps preserve the soundness of the stablecoin and provides liquidity to the consumer’s crypto holdings, permitting them to generate a euro-pegged token with out promoting their crypto, the spokesperson mentioned.
Decentralized and algorithmic stablecoins are promising use instances in line with the early cypherpunk ethos of the crypto group. Nevertheless, critics of algorithmic and decentralized steady tokens argue that these belongings carry substantial danger, pointing to a historical past of de-pegging occasions and token collapses.
Algorithmic and decentralized stablecoins have a behavior of de-pegging
Maybe essentially the most high-profile algorithmic token collapse was the implosion of the Terra-LUNA ecosystem and the de-pegging of UST, the ecosystem’s stablecoin, in Might 2022.
The algorithmic stablecoin relied on a mint-and-burn mechanism, the place customers would burn roughly $1 in LUNA tokens to mint roughly $1 in UST.
This strategy inspired arbitragers to make the most of worth discrepancies between LUNA and UST, which was supposed to maintain the worth of the token pegged to the US greenback.
Regardless of the theoretical safety supplied by arbitrageurs stepping in and correcting worth discrepancies in UST, a good portion of demand for UST got here from the lending platform Anchor Protocol, which provided customers a 20% yield on UST deposits.
Mass withdrawals from Anchor triggered a cascade of occasions that prompted UST to drop to $0.67 in Might 2022, earlier than collapsing completely to only $0.01.
UST didn’t function any collateral backing, not like different decentralized options similar to DAI (DAI) and dEURO, which require customers to deposit extra collateral in opposition to their loans.
Nevertheless, backing algorithmic and decentralized stablecoins with extra reserves has not confirmed to be a panacea for de-pegging occasions.
Furthermore, collateral backing has not been sufficient to completely shield conventional fiat stablecoins, backed by US debt devices and financial institution deposits, from shedding their forex pegs.
DAI, the decentralized stablecoin of Sky, previously MakerDAO, de-pegged in March 2023 after Circle’s USD Coin (USDC), which was used as collateral backing for DAI, briefly misplaced its dollar-peg.
Journal: Unstablecoins: Depegging, financial institution runs and different dangers loom
