What is Tether’s gold-backed stablecoin, ‘Alloy’ (aUSD₮)?
What is a joint property?
Peer-linked assets are versatile digital tokens designed to track the value of various reference assets, such as the United States dollar.
Also called stablecoins, linked assets can be backed by a single asset type such as gold, a specific fiat currency, or a diversified portfolio of multiple assets, providing greater flexibility and risk management options. This flexibility allows linked assets to track the value of various assets, including major currencies such as the US dollar or euro, other financial instruments such as gold, oil and wheat, or stocks or bonds.
Affiliated assets are managed in a variety of strategies along with their underlying assets, often combining leveraged leverage with strong liquidity pools in secondary markets. By holding reserves above the value of the given assets and ensuring smooth trading in secondary markets, these strategies aim to stabilize the value of the tied assets and align them closely with the reference asset.
The best-known example of a tethered asset is Tether (USDT), whose reserve is proportional to the amount of USDT in circulation. It aims to maintain a 1:1 peg with the US dollar. Despite its growth, Tether has faced scrutiny and regulatory issues due to the reduction of events.
To address such issues, Tether regularly uses independent credentials to verify backups in response to regulatory oversight. In April 2024, Tether completed a System and Organizational Controls 2 (SOC) audit, the highest level of security compliance. In addition, it publishes quarterly reports detailing its holdings and asset mix to improve operational transparency.
Mixed (aUSD₮) in Tether, explained.
Alloy (aUSD₮) is produced by Tether using EVM-compatible smart contracts and uses Tether Gold (XAU₮), a digital representation of physical gold, for stability.
AUSD₮ is the first Tether Alloy designed to track the US dollar using Tether Gold as collateral. It is built using Ethereum Virtual Machine (EVM) compatible smart contracts, which allows for smooth interaction and integration across the wider Ethereum ecosystem and various compatible blockchains.
By using Tether Gold (XAU₮) as a collateral, Alloy by Tether positions itself as a digital value associated with the stability and scarcity of gold, a traditional store of value known for its low volatility. XAU₮ is an ERC-20 token equivalent to one troy ounce (31.1 grams) of gold on the Ethereum blockchain. Each blockchain address containing XAU₮ is linked to real gold stored in a Swiss vault on behalf of Tether Gold Token holders.
But is Alloy Tether licensed in any jurisdiction? Alloy is a technology platform that uses Tether smart contracts. However, the National Commission of Digital Assets in El Salvador allows Moon Gold NA, SA de CV, and Moon Gold El Salvador, SA de CV to issue and manage aUSD₮.
How to connect with Alloy on Tether Smart Contracts?
Alloy is a platform where Tether smart contracts allow users to generate and redeem aUSD₮ using XAU₮ through a user-friendly web interface. The web interface is easily accessible at alloy.tether.to.
Technically competent individuals can directly interact with contracts using special tools. It is important to note that only verified Ethereum addresses that have completed Know Your Customer (KYC) checks can participate with these smart contracts. More information can be found in the front-end documentation on Alloy by Tether.
How Alloy (aUSD₮) works
AUSD₮ combines the stability of the US dollar with the value-preserving properties of gold to serve as a stable unit of account. The three main principles of aUSD₮'s functionality are the overmatch, the vault and the liquidity strategy.
Over reliance
AUSD₮'s key feature is overconformity. AUSD₮ tokens are backed by Tether Gold (XAU₮) more than its face value. This excess XAU₮ acts as a buffer, protecting the stability of aUSD₮ from fluctuations in gold prices. This means that users must enter a collateral value higher than the value of aUSD₮ they intend to generate.
By locking a certain amount of Tether Gold into a smart contract, the user can generate equivalent aUSD₮. The maximum aUSD₮ mint item is measured by the collateral-to-asset ratio, known as the liquidity point.
Mixture in Tether Volts
Ethereum-compatible core smart contracts called Vaults are used to generate and manage aUSD₮. These smart contracts facilitate independent and permissionless verification of XAU₮ collateral backing aUSD₮ transfer.
Vault plays several roles in the aUSD₮ ecosystem:
Storing Unspent aUSD₮ Users Collateralized Combined Position (CMP) Data Storing address parameters such as traded aUSD₮, offered XAU₮ and the spot's mint-to-value (MTV) ratio
Only addresses that have successfully completed the KYC verification process can interact with Vault & Mint aUSD₮. These verified addresses are authorized for the authentication process.
The Vault uses this information to assess the site's efficiency. If it is close to liquidation, authorized liquidators are allowed to intervene, withdrawing the user's XAU₮ and returning the corresponding amount of aUSD₮ not exceeding the reduced amount. This method preserves the integrity of the system and protects against less cooperation.
Each Vault uses a designated term to define both XAU₮ tokens and their associated associated assets. For aUSD₮, the Tether asset oracle specifically tracks the value of the US dollar, which is a 1:1 peg between aUSD₮ and $1.
Vault technology automates the processes of generating, redeeming and disbursing aUSD₮ while ensuring transparency and trust in the system, critical to the operation and security of the Alloy by Tether system.
Guarantee liquidation
Liquidation occurs when the price of the underlying security falls below a predetermined threshold. Each CMP's liquidity score is 75%, defined as the maximum MTV ratio, which represents the maximum amount of collateral that can be recorded. CMP, in this context, refers to the amount of aUSD₮ held as collateral for a certain amount of XAU₮ per user.
If a position approaches the liquidity limit, authorized liquidators intervene to free up the position, returning the user's XAU₮ and aUSD₮ the amount originally deducted. Liquidators manage positions close to liquidity by acquiring the collateral at a small discount to return aUSD₮. Depending on the situation and the discount agreed upon, you can purchase part or all of the mortgage.
How to get Aloy (aUSD₮).
Users can earn aUSD₮ by converting XAU₮ to aUSD₮ smart contracts or by trading on exchanges such as Bitfinex. Fees apply to generate, redeem and liquidate aUSD₮.
Users can transfer XAU₮ to aUSD₮ smart contract to receive a corresponding amount of aUSD₮ directly to the user's address or trade aUSD₮ on a secondary market such as Bitfinex or decentralized exchanges (intermediate market). DEXs).
Alloy by Tether charges three types of fees, measured in basis points (bps). A basis point is a unit of measurement used to express a percentage or difference in interest rates or profits. One basis point is equal to 1/100th of 1% or 0.01%.
Mint fee
The mint fee refers to the fee paid by users when creating new aUSD₮ tokens. Currently, it is charged at 25 bps per each newly minted aUSD₮.
Return payment
The redemption fee is the fee paid by users when they purchase aUSD₮ tokens as collateral. Currently, a 25 bps fee is applied to each aUSD₮ return.
liquid payment
A liquidation fee is a payment made when the user's collateral position (the ratio of XAU₮ to aUSD₮) falls below a certain threshold, which triggers a liquidation event. Currently, liquidators are charged 75 bps on each liquidation of XAU₮, which amounts to a fee of 0.05% of the value of each XAU₮ token that a liquidator acquires during a liquidation event.
It should be noted that the liquidity fee is different from the liquidity premium, which is used to incentivize liquidators to maintain system efficiency by offering a discount on liquid XAU₮. On the other hand, the liquidity fee is paid by the liquidator to the platform or protocol and helps to cover the operational costs associated with the process.
What are the benefits of aUSD₮?
AUSD₮ offers a range of benefits including stability through dollar peg and gold backing and transparency through auditable smart contracts.
AUSD₮, backed by Tether Gold (XAU₮), offers a unique investment opportunity. The US dollar peg and the intrinsic value of gold, a popular safe-haven asset, stabilize a stable currency. This combination reduces the volatility often associated with cryptocurrencies by providing a secure store of value.
Additionally, aUSD₮ is based on the Ethereum blockchain and uses auditable smart contracts, providing secure, transparent withdrawal and redemption processes. The over-buying model and its compatibility with the Ethereum ecosystem facilitate the generation of additional products and seamless integration with various decentralized finance (DeFi) platforms.
Fully on-chain, it provides investors with stability, diversification and passive income opportunities, offering an unbeatable alternative to the traditional banking system (eg, overdraft products).
Tether fiat-pegged tokens (USD₮) vs. Tether Gold tokens (XAU₮), vs. Alloy by Tether (aUSD₮)
USDT is a stablecoin to the US dollar; XAU₮, a gold-backed token representing one troy ounce of physical gold and offered by TG Commodities Limited; And aUSD₮ is a stablecoin pegged to the US dollar but backed by Tether Gold (XAU₮).
While Tether (USDT) is designed for daily trading, XAU₮ is ideal for investors who want exposure to gold, and aUSD₮ combines the stability of the dollar with the safety of gold to produce a yield through its unique leverage mechanism.
The table below explains the key differences between Tether fiat-pegged tokens (such as USDT), Tether Gold tokens (XAU₮) and Alloy by Tether (aUSD₮) in various parameters.
How can users retrieve XAU₮ saved as collateral?
Users can retrieve deposited XAU₮ by requesting a withdrawal. To avoid rejection, the MTV ratio must remain below 75% (liquid point).
Users must initiate a withdrawal request from Alloy using a Tether Vault smart contract. If the termination causes the MTV ratio to exceed the 75% liquidity point, the request will be rejected. This is to ensure that the system is overloaded.
A withdrawal request will not be accepted if it increases the MTV ratio by more than 75%. In such cases, users can lower their MTV ratio by withdrawing a portion of aUSD₮ before trying to withdraw again. Also, it's important to remember that withdrawing XAU₮ without an AUSD₮ return will increase the MTV ratio, thus increasing the liquidity risk.
Additionally, to get all XAU₮ deposited, users must return the total minus aUSD₮ they collected. This may require buying some aUSD₮ on the secondary market to cover the shortfall and successfully complete the exit process.
So when do you need to buy aUSD₮ to exit XAU₮? Users pay a processing fee when they spend aUSD₮. Similarly, a return fee will be charged when returning aUSD₮ to redeem their XAU₮ holdings. These fees are deducted in USD₮.
That is why the user must return all aUSD₮ they have spent before withdrawing all XAU₮. However, due to the fees paid during production and return, the aUSD₮ you hold may not be enough to cover the full return and you will have to buy more aUSD₮ on the secondary market.
