Although the term “stablecoins” connotes unity of purpose across different issuers to stabilise the value of tokens issued on the blockchain, mechanisms used by issuers to achieve such purpose vary widely. So even as stablecoin “commonly refers to a crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets,” the range of products which have labelled themselves as stablecoin rely on a range of different mechanisms to stabilise the token value, and they may vary in terms of the nature of the underlying value and backing.
We can further classify price stability mechanisms in four categories:
Fiat-backed stablecoins are collateralised with a singular fiat currency. These tokens tend to be issued by a centralised financial institution and offer lower risks to consumers and financial systems because of their price built-in stability and redeemability. They also have the added benefit of keeping central banks in control of the monetary policy as no additional unit of money is added to the money supply.
This is the case for the StraitsX XSGD and XIDR, where one XSGD and one XIDR are backed by one Singapore Dollar (SGD) and one Indonesian Rupiah (IDR) respectively. Reserves for XSGD and XIDR are 100% backed by cash and are redeemable on a one-for-one basis.
The fiat collateral is usually held by the issuer or safeguarded by a licensed entity. In the case of the XSGD, the cash reserves are safeguarded by a full bank licensed by the Monetary Authority of Singapore (MAS). Likewise, XIDR reserves are also kept entirely in cash in a regulated financial institution in Indonesia.
However, other fiat-backed stablecoins may not be 100% backed by cash. Some fiat-backed stablecoins may include other collateral such as cash equivalents, commercial paper, national treasuries, or municipal and corporate bonds. As these collaterals are not as liquid as cash, the issuer may not be able to enable instantaneous redemption of all tokens if most of its holders may choose to redeem tokens at once.
Besides the mix of assets making the reserve, the key risk for fiat-backed tokens is the counterparty risk inherent with the safeguarding of the funds. StraitsX only partners with licensed entities that comply with regulatory requirements and the highest standards to safeguard XSGD and XIDR fiat reserves.
Commodity-backed tokens refer to physical commodities such as precious metals like gold or silver, oil, and real estate. An example would be Paxos Gold (PAXG), where one PAXG can be redeemable for one fine troy ounce of gold.
Commodity-backed tokens remain susceptible to price volatility and asset redeemability issues. Commodities are more likely to fluctuate in price compared to fiat. The main challenge of commodity-backed tokens is the way in which commodities are stored and secured. Issuers of these tokens need to ensure that the underlying commodities can be redeemed by their token holders in a timely manner. Regulatory frameworks governing these assets differ based on the types of assets, as well as the region they are located in.
Crypto-backed tokens are generally over-collateralized with underlying volatile crypto assets to maintain the value of the asset they are pegged to. For example, Dai (DAI) attempts to maintain parity with the US Dollar by over-collateralising Ethereum-based assets in a smart contract.
The technical implementation of crypto-backed tokens is significantly more complex and varied than that of fiat-backed tokens, as the collateralisation process happens entirely on-chain. This introduces a greater risk of exploits due to bugs in the smart contract code. The potentially problematic aspect of crypto-backed tokens is the constant change in the value of the collateral and the reliance on supplementary instruments. Due to the volatile nature of the underlying crypto assets, large amounts of collaterals are required to ensure stability. Risk requirements, parameters and safety measures such as collateralisation ratios and debt ceilings need to be maintained and monitored to ensure the crypto-backed token maintains its intended price. The complexity and non-direct backing of such tokens may be hard to regulate and may deter users, as they may struggle to comprehend how the price is maintained.
Algorithmic tokens tend to leverage specialised algorithms to achieve price stability. The algorithm mints and burns circulating tokens to mimic the value of the fiat currency it tracks. When the market price falls below the target price, tokens are burnt to bring the value of the token up. An example of an algorithmic token would be Ampleforth (AMPL), which adjusts its supply on a daily basis to minimise volatility.
Without hard underlying assets to provide assurance of value, uncollateralized products face higher volatility. Given the complexity of the algorithmic stabilisation mechanism, the risk of fraud or operational mismanagement is especially high, particularly if errors occur in the issuance or redemption algorithm. Another risk with some such implementation is the risk of “death spirale”, exemplified by the recent collapse of UST Terra, due to a level of correlation between the minting/burning process and the value of the underlying (Luna in the case of UST Terra).
XSGD and XIDR stability stem from a strong combination of StraitsX holding fiat money in its reserve for an amount equivalent to the number of tokens in circulation, one-for-one convertibility, availability, short settlement time, daily internal reconciliations, monthly attestations by an independent third-party audit firm, as well as a solid compliance infrastructure that operates together to create a digital token that represents one SGD and one IDR.
XSGD and XIDR have maintained stability amid volatile market conditions. StraitsX verified users continue to be able to redeem XSGD and XIDR for SGD and IDR at a one-for-one rate via the StraitsX platform. Since its inception, XSGD reserves are kept entirely in cash in a full bank licensed by the Monetary Authority of Singapore (MAS). Similarly, XIDR reserves are also kept entirely in cash in a regulated financial institution in Indonesia. XSGD and XIDR are one of the only stablecoins in the world that are 100% backed by cash only.
Since April 2022, StraitsX has begun issuing attestations of the reserves backing the XSGD tokens on a monthly basis. This report outlines all SGD-denominated reserve assets held in Singapore with approved financial institutions.
Reports can be obtained here.
StraitsX is currently identifying a reputable third-party auditor to provide attestations for XIDR tokens and will be issuing monthly attestations of the reserve backing XIDR tokens soon.
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