StraitsX Earn runs on XSGD and USDC, which are fully fiat-backed stablecoins. Fiat backed stablecoins maintain their price even during volatile crypto markets, as their collateral is the Dollar itself, rather than being backed by assets that are volatile relative to the Dollar.
To better understand how fiat-backed stablecoins ensure stability for StraitsX Earn users, let’s take a look at the different types of stablecoins.
These stablecoins are collateralised one to one by fiat currencies such as the Singapore Dollar in XSGD’s case, and the US Dollar for USDC. This means that each stablecoin on the blockchain must have a corresponding Dollar’s worth of cash (or cash equivalent assets such as short term US Treasuries) held in reserve with financial institutions such as banks.
These stablecoins are backed by other cryptocurrencies such as Ether (ETH). Due to the fact that these reserve cryptocurrencies have high price volatility, such stablecoins may be over-collateralised, for example, the value of the reserve cryptocurrencies held as collateral exceeds the value of the stablecoins issued) to act as a buffer against volatility of the underlying reserve assets.
Perhaps one of the most controversial forms of backing stablecoins, an algorithmic stablecoin is programmed to respond to swings in prices by self-adjusting its supply to keep the price stable. For example, a stablecoin trading below its pegged value would automatically destroy some of its own supply, creating scarcity and driving price up back towards the peg. The converse happens if the stablecoin trades above its pegged value. With such an approach, some algorithmic stablecoins may be un-collateralised (backed by no reserve asset).
An example of an algorithmic stablecoin would be UST, which saw its algorithm break down in May 2022, because it had been propped up by two price-volatile cryptocurrencies (LUNA and BTC) which were vulnerable in times of extreme market swings and negative sentiment.
Unlike crypto-backed and algorithmic stablecoins, fiat-backed stablecoins remove the risks posed by price-volatile cryptocurrencies. StraitsX Earn runs only on XSGD and USDC, fully fiat-backed stablecoins that will retain their value as long as they are redeemable 1:1 for cash and cash equivalents backed by the government.
StraitsX Earn only holds user funds in XSGD or USDC, and provides them directly to DeFi liquidity pools (LPs). StraitsX Earn receives a cut from transaction fees paid for swapping between XSGD and USDC in these liquidity pools which in turn allows StraitsX Earn to offer returns to users.
The availability of the collateral, straightforward redemption mechanism, and independence from price volatility of other cryptocurrencies, combine to ensure that XSGD and USDC do not suffer from the same loss of confidence that might lead to the collapse of other forms of stablecoins.
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