What is a Tether asset?
Tether assets are a variety of digital tokens designed to track the prices of various reference assets, such as the US dollar.
Tethered assets, also called stablecoins, can be backed by a single type of collateral, such as gold, a specific fiat currency, or a diversified portfolio of different assets, providing greater flexibility and risk management options. This flexibility allows tethered assets to track the price of a wide range of assets, including major fiat currencies such as the US dollar or euro, commodities such as gold, oil, and wheat, and even other financial instruments such as stocks and bonds.
Tether assets maintain a peg to the underlying asset through a variety of mechanisms, often combining overcollateralization with strong liquidity pools in the secondary market. By holding reserves in excess of the value of issued assets and ensuring smooth trading in secondary markets, these strategies aim to stabilize the value of the Tether asset and align it closely with the reference asset.
A well-known example of a Tether asset is Tether (USDT), which claims its reserves are equal to the amount of USDT in circulation. The goal is to maintain a 1:1 peg with the US dollar. Despite its growth, Tether is facing scrutiny and regulatory issues due to the depegging incident.
To address these issues, Tether regularly obtains independent certification to verify its reserves in response to regulatory scrutiny. In April 2024, Tether completed its System and Organizational Controls 2 (SOC) audit, the highest level of security compliance. Additionally, to increase transparency of our operations, we publish quarterly reports detailing our reserves and asset composition.
Alloy of Tether (aUSD₮) Description
Tether’s Alloy (aUSD₮) is issued using EVM-compatible smart contracts and leverages Tether Gold (XAU₮), a digital representation of physical gold, for stability.
AUSD₮ is Tether’s first alloy designed to track the US dollar using Tether Gold as collateral. It is issued using Ethereum Virtual Machine (EVM) compatible smart contracts, allowing for seamless interoperability and integration within the broader Ethereum ecosystem and a variety of compatible blockchains.
Alloy by Tether, which uses Tether Gold (XAU₮) as collateral, is positioned as a digital asset based on the stability and scarcity of gold, a traditional store of value known for its low volatility. XAU₮ is an ERC-20 token equivalent to 1 troy ounce (31.1 grams) of gold on the Ethereum blockchain. Each blockchain address holding XAU₮ is linked to real gold stored in a Swiss vault on behalf of Tether Gold token holders.
But is Alloy by Tether licensed in any jurisdiction? Alloy by Tether is a technology platform that leverages smart contracts. However, El Salvador’s National Commission for Digital Assets (CNAD) grants the issuance and management authority of USD₮ to Moon Gold NA, SA de CV and Moon Gold El Salvador, SA de CV.
How to interact with Alloy through Tether smart contracts?
The Alloy by Tether smart contract can be accessed through the platform’s user-friendly web interface, where users can mint and redeem USD₮ using XAU₮. The web interface is easily accessible at Alloy.tether.to.
Technically proficient individuals can interact directly with contracts using specialized tools. It is important to note that only verified Ethereum addresses that have completed Know Your Customer (KYC) checks can participate in these smart contracts. Additional information can be obtained through the frontend documentation for Alloy by Tether.
How Alloy (aUSD₮) Works
AUSD₮ serves as a stable unit of account, combining the stability of the U.S. dollar with the value-preserving properties of gold. The three core principles of USD₮ functionality are overcollateralization, vaulting, and clearing mechanisms.
Excess collateral
The main characteristic of USD₮ is overcollateralization. The AUSD₮ token is backed by a Tether Gold (XAU₮) value greater than its face value. This surplus XAU₮ acts as a buffer, protecting the stability of USD₮ from potential fluctuations in the price of gold. This means that users must deposit collateral of a value greater than the value of USD₮ they wish to mint.
By locking a specified amount of Tether Gold into a smart contract, users can mint that amount of USD₮. The maximum aUSD₮ that can be minted per person is determined by the collateral-to-asset ratio, known as the liquidation point.
Alloys in Tether Vaults
An Ethereum-compatible core smart contract called Vault is used to mint and manage USD₮. These smart contracts facilitate independent, permissionless verification of the XAU₮ collateral backing USD₮ circulation.
Vault plays a variety of roles in the USD₮ ecosystem.
- Store your collateral
- Storage of unissued USD₮
- Store the user’s CMP (collateral issuance position) information
- Stores address metrics such as USD₮ minted, XAU₮ offered and the Mint Value (MTV) percentage of the position
Only addresses that have successfully completed the KYC verification process will be able to interact with the vault and mint USD₮. These verified addresses are added to the whitelist for the issuance process.
The vault uses this data to assess the solvency of the position. As liquidation approaches, an authorized liquidator may step in to extract the user’s XAU₮ and return that amount of USD₮, not exceeding the issued amount. This mechanism protects the integrity of the system and prevents collateral shortages.
Each Vault uses a designated oracle to determine the price of XAU₮ tokens and the corresponding Tether asset. For aUSD₮, the Tether asset oracle will specifically track the US dollar price and establish a 1:1 peg between aUSD₮ and $1.
Vault technology is critical to the functionality and security of the Alloy by Tether system as it automates the issuance, redemption and clearing process of USD₮ while ensuring transparency and trust in the system.
collateral liquidation
Liquidation occurs when the value of the collateral backing the issue amount falls below a predetermined threshold. The liquidation point for each CMP is 75%, defined as the maximum MTV ratio, which represents the maximum percentage of collateral value that can be issued. In this context, CMP refers to an amount of USD₮ issued by a user backed by a certain amount of XAU₮ held as collateral in a vault.
When a position approaches the liquidation threshold, an authorized liquidator will step in to liquidate the position, reclaiming the user’s XAU₮ and returning USD₮ up to the original minted amount. Liquidators manage positions close to liquidation by acquiring collateral at a small discount in exchange for returning USD₮. Depending on the circumstances and an agreed discount, you may be able to purchase some or all of the collateral.
How to obtain Alloy (aUSD₮)
Users can earn USD₮ by depositing XAU₮ into the aUSD₮ smart contract or trading it on exchanges such as Bitfinex. Fees apply for issuance, return and liquidation of USD₮.
Users can mint aUSD₮ of that amount by transferring You can get (DEX).
Alloy by Tether charges three types of fees, which are measured in basis points (bps): A basis point is a unit of measurement used to describe a percentage or difference in an interest rate or yield. One basis point is equal to 1/100th of 1% or 0.01%.
mint fee
Mint fees refer to the fees incurred when users create new USD₮ tokens. Currently, 25 bps is charged for each newly minted USD₮.
return fee
The return fee is the fee paid by the user when redeeming USD₮ tokens as underlying collateral. Currently, a 25bps fee applies to each USD₮ return.
Clearing fee
Liquidation fees are fees charged to users when their collateral position (ratio of XAU₮ to USD₮) falls below a certain threshold, triggering a liquidation event. Currently, whenever XAU₮ is liquidated, liquidators are charged 75bps. This means that for every
It is worth noting that the liquidation fee is different from the liquidation premium, which is a discount on liquidated XAU₮ used to incentivize liquidators to keep the system solvent. Clearing fees, on the other hand, are paid by the clearer to the platform or protocol and help cover the operational costs associated with the clearing process.
What are the advantages of USD₮?
AUSD₮ offers a variety of benefits, including stability through a 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 well-known safe asset, stabilize stablecoins. This combination reduces the volatility often associated with cryptocurrencies by providing a reliable store of value.
Additionally, aUSD₮ is based on the Ethereum blockchain and utilizes auditable smart contracts to provide a secure and transparent issuance and redemption process. The overcollateralization model and compatibility with the Ethereum ecosystem further facilitate yield generation and seamless integration with various decentralized finance (DeFi) platforms.
Operating entirely on-chain, the system provides a resilient alternative to the traditional banking system, providing investors with stability, diversity, and passive income opportunities (e.g. returns from overcollateralization).
Tether’s fiat-pegged token (USD₮) vs. Tether Gold token (XAU₮) vs. Tether’s Alloy (aUSD₮)
USDT is a stablecoin pegged to the US dollar. XAU₮, a gold-backed token representing 1 troy ounce of physical gold offered by TG Commodities Limited; aUSD₮ is a stablecoin pegged to the US dollar but backed by Tether Gold (XAU₮).
While Tether (USDT) is designed for everyday trading, provide.
The table below explains the key differences between Tether’s fiat-pegged tokens (such as USDT), Tether Gold tokens (XAU₮), and Alloy by Tether (aUSD₮) across various parameters.
How can users retrieve the XAU₮ deposited as collateral?
Users can retrieve their deposited XAU₮ by requesting a withdrawal. To avoid rejection, the MTV ratio must remain below 75% (clearing point).
Users must initiate a withdrawal request from Alloy using the Tether Vault smart contract. If your withdrawal causes your MTV ratio to exceed the 75% liquidation point, your request will be rejected. This is to ensure that the system remains overcollateralized.
If your MTV ratio increases above 75%, your withdrawal request will not be approved. In these situations, users can lower their MTV rate by returning a portion of their minted aUSD₮ before attempting to withdraw it again. It is also important to remember that withdrawing XAU₮ without returning the corresponding USD₮ will increase your MTV rate, increasing your risk of liquidation.
Additionally, in order to recover all deposited XAU₮, users must return the entire USD₮ minted amount. You may need to buy back some aUSD₮ from the secondary market to compensate for the deficit and successfully complete the withdrawal process.
So when should I buy back USD₮ to withdraw XAU₮? Users pay an issuance fee when minting USD₮. Similarly, if you return USD₮ to redeem your XAU₮ collateral, a return fee will be charged. This fee is deducted in USD₮.
Therefore, users must return all minted aUSD₮ before withdrawing all XAU₮. However, due to the fees incurred during the issuance and return process, the amount of USD₮ you hold may not be enough to cover the entire profit, and you will need to purchase additional USD₮ on the secondary market.