How overcollateralized stablecoin $CMST offers a safehouse investment option?
Busting some myths about $CMST
A couple of contradicting questions came our way in some AMAs for our stablecoin $CMST.
Q1) Why back a stablecoin with a centralized stablecoins like $USDC? ($USDC used for example purpose only)
Q2) Why back a stablecoin with unstable assets? This will trigger a lot of liquidations in market volatility.
“Let’s first understand the stablecoin types”:
Fiat-collateralized
Crypto-collateralized
Algorithmic
Fiat-collateralized:
Fiat collateralized stablecoins are issued by centralized third parties that have custody of your fiat cash in a bank account most of the time.
An investor deposits $1 with a central issuer, and the issuer issues a stablecoin representing that dollar.
The issuer holds the dollars in a bank account and tracks each stablecoin's value.
The stablecoin is always redeemable for $1 from the issuer, which is the leading assurance.
Example: $USDC and $USDT
Shortcoming:
Fiat deposits are in the custody of centralised entities. Investors and holders of the stablecoin must trust these entities to report the status of their reserves. This system lacks transparency and gives this entity the right to blacklist or ostracise wallets based on their activities
Crypto-collateralized:
Crypto-collateralized stablecoins are mostly issued by DeFi protocols and have no involvement with any centralized parties; they exist on-chain. These are primarily over-collateralized.
Investors deposit cryptocurrency with a decentralized issuer (DeFi protocol), who then issues stablecoin as debt against them. Every crypto-backed stablecoin in circulation is directly backed by excess collateral, meaning the collateral will always be more in value for every dollar issued. To redeem their crypto assets, the investor must repay the stablecoins with some fees.
Example: $DAI
Shortcoming:
Backing a stablecoin with volatile collateral does not end well. Over-collateralization leads to lower capital efficiency. Crypto collateralised stablecoins are highly dependent on the smooth functioning of their liquidation mechanism. Any failure of liquidation can cause severe issues in the peg of the stablecoin. For example, $DAI was backed by $ETH, but on Black Thursday, when $ETH dipped nearly -45% in a day, they were exposed to the de-pegging of $DAI, which led to a death spiral scenario.
Algorithmic:
They primarily rely on incentive algorithms that allow users to adjust the stablecoin's supply to keep its price stable. The necessary guarantee is that the incentive and algorithmic systems function as intended and that the stablecoin keeps its peg by issuing and reducing its supply.
Example: Terra $UST
Shortcoming:
The algorithmic, non-collateralized model is ineffective. Instead, they rely on a mechanism that aims to keep the price stable by expanding and contracting the supply of stablecoin. They can be potentially undercollateralized.
Let's now dive into the specifics of $CMST
$CMST is an overcollateralized stablecoin backed by crypto assets. Usually, fiat collateralized models have blacklisting and custody problems, whereas $CMST is a decentralized stablecoin without such risks. Everything is code and fully transparently provable on the chain. The dangers associated with centralized stablecoins are reduced by $CMST, and they provide outstanding arbitrage value because they are stable and can be redeemed 1:1.
The fiat stablecoin would only make up a fraction of the collateral; it is NOT the only kind of collateral supporting it. Inbuilt debt ceilings limit the amount of $CMST that can be minted from a single collateral asset to ensure limited exposure for the protocol to a single asset type. Therefore, no further $CMST can be minted through the selected collateral when the debt ceiling is hit. Fiat stablecoins only act as a buffer during market turbulence and offers a constant extractable value rather than fluctuating ones that could set off spiral scenarios.
The Stablemint module on Harbor protocol allows whitelisted market participants (market makers) to mint $CMST as a 1:1 mint against stablecoins like USDC, USDT, and DAI to achieve short-term arbitrage. Unlike CMST minted from vaults, stable-mint CMST does not accrue an interest rate and can always be redeemed for underlying stable assets 1:1 by the same market participants. A fee is charged upon minting and redeeming from Stablemint.
This answers the first question: Why back a stablecoin with centralized/ fiat stablecoin?
Now, why back a stablecoin with unstable assets?
Since the use of cryptocurrencies as collateral for loans is expanding, it is clear that there is a demand for a lending market in the Cosmos ecosystem. For example, assume you have a large stack of $ATOM and don't want to sell it, but you notice a short-term potential to profit, and the only alternative you currently have is to sell your $ATOM to access liquidity to seize the opportunity. With a money market in place, you can collateralize your $ATOM, take a $CMST loan against it, take advantage of the opportunity, and repay the loan.
Much like the case with fiat, where all fiat exists as debt or IOUs, and is "minted" by central banks against over collateralized assets. Harbor protocol aims to serve as an interchain central bank where holders of crypto assets across various ecosystems can collateralize their holding to generate stablecoin liquidity to deploy across various markets. This allows for decentralized participation in money markets for individuals holding any amount of crypto assets.
As an example:
Any user with $ATOM holding may opt to collateralize their $ATOM to capitalize on other profit or yield opportunities in the market. By not selling their $ATOM to do so, they are essentially maintaining their long $ATOM position and effectively levering up by taking simultaneous exposure elsewhere.
As a result, participants now have access to a brand-new money market. Without a single asset risk, various asset kinds would be used, and all volatile assets would have undergone evaluation and risk assessment. A limited threshold will prevent borrowing against a given piece of collateral once the limit has been reached. It will be a basket of assets, and each asset will only make up a particular portion of the overall backing.
Read more about Composite here: Introducing Composite: A collateralized stablecoin for IBC
You can read about more about how the defence mechanisms for maintaining the peg works in this thread:
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In terms of trying to make profits or yield from other market, does this mean a user with stack of $Atom can mint $CMST (while collateralizating the $Atom) to buy for e.g $OSMO and then repay back the $CMST with interest?