Stablecoins are digital currencies often pegged to a fiat currency like the U.S. dollar or to a commodity like gold. To maintain price stability, stablecoins hold a reserve of whatever fiat or commodity they are pegged against as collateral.
Stablecoins have four different types — fiat-backed, crypto-backed, commodity-backed and algorithmic. Three types are relatively easy to understand because tangible assets back them such as fiat currencies, other cryptocurrencies or commodities like precious metals.
The fourth type of stablecoin is different; they are non-collateralized stablecoins. They rely on an algorithm to control the supply of stablecoins to stabilize the price. Demand for the stablecoin increases puts upward pressure on the price. In this instance, the algorithm increases the supply of stablecoins, pushing the price back to the baseline. Conversely, a decrease in the demand for the stablecoin decreases puts downward pressure on the price. In this case, the algorithm reduces the supply of stablecoins, pushing the price back to the baseline.
Stablecoins, contrary to their name, are not always stable. Even USDT, which is supposed to be backed by tangible assets, has had a controversial past. For quite some time, controversy has surrounded Tether (USDT) about whether or not fiat currencies fully backed its reserves. The following article will examine NEAR Protocol's Stablecoin USN and how it works.
Tether USDT Price Chart
Late last year, Tether was fined $41 million by the U.S. Commodity Futures Trading Commission (CFTC) for making untrue claims that fiat currencies fully backed USDT. This accusation came from the period between 2016 and 2019 when the CFTC said Tether misled customers and the crypto market by stating that it had “sufficient U.S. dollar reserves” to back every token. As you can see by the price chart above, it has also experienced periods of price instability.
Tether’s issues pale compared to what happened lately with the collapse of TerraUSD (UST) and LUNA. Terra is a blockchain protocol launched in 2018 that uses fiat-pegged stablecoins to power a global payment system. Luna is the native token of the Terra blockchain and is used to stabilize the price of the protocol’s stablecoins.
TerraUSD maintains a one-to-one peg through an algorithm that automatically adjusts stablecoin supply based on demand. On May 7, 2022, almost $85 million was swapped for USDC. On May 8, the price dropped to $0.985 after large dumps of UST on Anchor and Curve. What followed was a total collapse of both UST and LUNA.
TerraUSD (UST) Stablecoin
The collapse of UST and LUNA illustrates a potential danger of algorithmic stablecoins. So far, USN has been able to maintain its peg, but it was launched just a month ago. NEAR uses a slightly different approach, which could keep it from suffering the same fate as UST and LUNA.
NEAR uses a fixed supply rather than being unlimited. It accomplishes this goal by avoiding an oversupply that can feed into a death spiral, as seen with UST and LUNA. Also, Terra used a mint and burn mechanism, whereas NEAR uses a treasury to maintain the dollar peg.
Overview of USN
USN is a decentralized stablecoin that is soft-pegged to the U.S. dollar. USN does not hold U.S. dollar reserves but is backed by a reserve fund that contains collateral such as NEAR and USDT. USN relies on an algorithm to maintain price stability. USN is the stablecoin for the NEAR protocol, and it was designed to improve liquidity and usability on the blockchain. Although NEAR does have a total and maximum supply, USN does not.
USN was launched on April 20, 2022, so it is still new and testing the waters in this market. Whether or not it can avoid the same fate as Terra’s UST remains to be seen. It most likely will be an uphill battle as the collapse of UST and LUNA are fresh in investors' minds and may make them shy away from algorithmic stablecoins.
Why do People use USN?
The reasons people would use USN would be the same as other stablecoins. People could use USN to make payments for peer-to-peer payments or to any merchant who would accept it as payment.
It is also possible USN could be used as collateral for margin trading or crypto loans. This type of use could vary from one exchange to another depending on if USN is accepted as collateral.
Another use for USN would be for traders to store their funds when they exit crypto trades. When traders close trades often, it is much more convenient to hold their funds in a stablecoin rather than in a fiat currency. Some exchanges may not even offer the choice of storing funds in fiat, which means using a stablecoin would be the only option.
Still, other people may use USN to earn passive income. Coming soon through Decentral Bank, the decentralized autonomous organization (DAO) developing NEAR-native stablecoins, it will be possible to stake USN and earn 10% APY.
USN History
NEAR protocol launched its mainnet on April 22, 2020. NEAR is a Layer 1 blockchain that was designed as a community-run cloud computing platform. Almost two years later, NEAR protocol launched its own algorithmic stablecoin, USN, on its public testnet.
Erik Trautman, an entrepreneur with Wall Street experience, founded NEAR protocol along with co-founders Alexander Skidanov and Illia Polosukhin. Skidanov is a former engineer at Microsoft, and Polosukhin is a former engineering manager at Google's research center. They met at the 2018 Y Combinator startup program and started work on NEAR soon after.
USN, having only been launched a couple of months ago, still has much to prove. Especially with the failure of UST, USN needs to show that it can avoid the same fate as UST before investors trust it.
Where to buy USN
You can only purchase USN on Ref.finance, a community-led decentralized exchange (DEX) built on NEAR protocol. Also, the only two wallets that will connect to Ref.finance are the NEAR wallet and Sender wallet.
If you decide that you want a NEAR wallet, you will click on “Create Account,” then click on “Get Started.” You must choose your security method, either Ledger hardware wallet or email. If you select email, click on it, then enter your email and click on “Secure My Account.” Next, you will have to retrieve and enter the 6-digit code sent to your email address.
Now, you will need to purchase and transfer NEAR tokens into your wallet before you can perform any transactions with the wallet. Fortunately, NEAR tokens are available at many exchanges, including Binance, Crypto.com and FTX.US.
NEAR Protocol vs. Other Blockchains
NEAR protocol is a Layer 1 blockchain protocol that eliminates some limitations common with competing blockchains such as slow transaction speeds, poor interoperability and low throughput. NEAR also has a unique solution to scaling problems and has its own consensus mechanism called “Doomslug.”
NEAR uses Nightshade technology to improve transaction throughput. Nightshade is a variation of sharding. As opposed to regular sharding, shards in Nightshade produce a fraction of the next block. NEAR can achieve up to 100,000 transactions per second and near-instantaneous transaction finality.
How to Store USN Safely
It appears that wallet choices are pretty limited for USN. But, USN is very new, so this may change in the future. It’s never recommended to keep much crypto on exchanges. Using a software or hardware wallet to store your crypto is always a wise choice.
A hardware wallet, also known as a cold storage wallet, is the most secure option for crypto-wallets. The Ledger and Trezor hardware wallets are two of the best on the market. Part of the reason a hardware wallet is so secure is that it can be isolated from the internet when not in use. At this time, though, it doesn’t appear that there is a hardware wallet that supports USN.
Only two wallets support USN: the NEAR wallet and Sender wallet. The NEAR wallet is a web-based wallet and Sender is a browser extension wallet. Either wallet will connect to Ref.Finance, the only exchange supporting USN.
Will USN Suffer the Same Fate as Terra’s Stablecoin UST?
Because USN has only been around for about two months, it is still too early to know if it can avoid the issues that took down UST. One big difference is that USN is backed by a reserve fund that contains collateral such as NEAR and USDT, and the initial supply of USN is double-collateralized.
Also, unlike Terra’s UST minting mechanism, NEAR converted into USN is not burned but transferred into the reserve fund. The differences in these mechanisms may be enough for USN to be a viable stablecoin, but only time will tell.
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About Donald Hancock
Donald’s expertise lies in the technical analysis of both stocks and crypto.