SigmaUSD vs the competition.
The Ergo blockchain (ERG) recently released SigmaUSD decentralized stablecoin. The stablecoin is Ergo’s iteration of the AgeUSD protocol that was designed by Emurgo. Emurgo is a blockchain company focused on layer 2 R&D in the extended UTXO model. Cardano, Ergo, and Emurgo are strategic partners working to advance research into what is possible on extended UTXO
Stablecoins have been one of the most innovative aspects of blockchain technology. A stablecoin is a synthetic asset that brings cashlike properties to the blockchain.
Not all stablecoins are created equal.
Centralized Banked Garbage Coins (CBGC)
The first category of stablecoins, Centralized Banked Garbage Coins, to me creates broad market risk. In cryptocurrency markets today, the majority of stablecoins are centralized.
They have either a single trusted party running the chain or a single point of regulatory failure.
The majority of the most used stablecoins, Tether, Gemini, and USDC, operate with a centralized entity holding assets in a trust account. They then issue and mint tokens that represent a 1:1 claim to the underlying assets held within the trust.
Centralized systems are not censorship-resistant. The trust is subject to regulation, and with the stroke of a pen could be censored. The success and failure of the system are determined by a select few in positions of power.
Are centralized stablecoins useful? Absolutely. Are they risky? Absolutely. They exist solely based on the generosity of the powers that be. They can be removed or changed at any time.
Centralized stablecoins served a purpose at one point in time, they filled a necessary gap. Bitcoin lacked cash-like speed and settlement. Stablecoins offered a cash-like experience. This was beneficial for liquidity and trading. However, in the end, I believe the censorship risk that these stablecoins create is not worth the tradeoff. In time I hope this type of stablecoin is displaced by a more decentralized store of value. Cryptocurrency needs to be censorship-resistant. That is literally the core philosophy behind using cryptography in distributed networks.
So all of these, use as you need, but realistically if we are to survive, long term as an industry, we need better options.
When the blockchain is dominated by a single party or company, it is centralized. The issuing entity of CBGC’s has the ability/authority to modify or reverse transactions. They are subject to their legal jurisdictions. In theory, laws could come about that could greatly disrupt, censor, or even outlaw their use.
We are already seeing multiple countries make it illegal to have a synthetic derivative of their currency. Thailand is the latest example.
The entire crypto ecosystem has been built on a market in which liquidity is provided by CBGC’s. This presents massive regulatory risks in my opinion.
We collectively need to change that to build greater security and censorship resistance into the crypto space as a whole.
A decentralized system built on centralized liquidity is not resilient. It is a weakness that I hope is seen, understood, and addressed.
The point of decentralization is to circumvent situations in which power is highly concentrated. Current market dynamics fail to address this flaw. The core infrastructure, which is built on stablecoins, needs to change to create greater censorship resistance.
If cryptocurrency is a revolution in finance for the people, we need to circumvent centralized finance. Blending the two might pump markets, but long term I believe this could be cancerous.
Central Bank Digital Currencies are coming. These pose a grave threat to the implementation of decentralization.
Algorithmic Alternative Dai
Dai from Maker was innovative in its time. Dai is a collateralized derivative of the dollar. To mint a Dai, a user sends collateral to a smart contract to create a “collateralized debt position” (CDP).
Collateralized Debt Positions allow anyone to take a predetermined portion of the market value of ETH and create a dollar derivative. Oracles are used to broadcast price data to the blockchain, as the price of Eth changes, smart contracts work to create and maintain a 1 to 1 peg Dai to USD.
The assets that are collateralized are not held in a central trust. They are held on a decentralized blockchain. However, the downside to Dai is Collateralized Debt Positions can be liquidated.
Last March on the now-infamous “Black Thursday,” MakerDAO CDPs were triggered for liquidation due to volatility. This allowed CDPs to sell for $0 due to blockchain being so congested that it prevented others from bidding.
Dai must be recognized for its contribution in creating a decentralized stablecoin however, as Black Thursday clearly demonstrates better designs are needed.
There are many coins based on collateralized debt positions. In a way these can be considered LoanCoins, as they exist so long as the collateral is healthy.
Enter Ergo SigmaUSD
SigmaUSD is an algorithmic stablecoin. It runs on a decentralized blockchain. The underlying smart contract has the ability to be updated by governance token holders in the Ergo community. Oracle pools feed the oracle data into the smart contract. These Oracle Pools are not only more decentralized than previous oracle data models on other chains, but they also have community governance.
Decentralized Smart Contract.
Decentralized Oracle Pool model, not to mention decentralized oracle governance allowing contracts to be updated.
If something is decentralized the focus is resilience. SigmaUSD clearly sets a new standard.
The next aspect to look at is liquidations. While participating in SigmaUSD there are no forced liquidations. The underlying collateralized reserves are held within a 400–800% range. Meaning at worst the value of the collateralized SigmaUSD drops below 400% of the value in reserve. In the event another of Black Friday, the contract simply locks.
Additional liquidity will need to be added to reserves to unlock the contract, but their are no forced liquidations, this prevents the Black Friday failure that Dai experienced.
Ergo is not natively a privacy coin. However, it has some of the most advanced privacy features in the cryptocurrency space. This is due to a combination of the underlying contract language, the extended UTXO model, and Ergo’s Sigma Protocols.
Ergo has an application called the Ergo Mixer. The Ergo Mixer is non-interactive, it is run by smart contracts. SigmaUSD can be mixed through this application.
A Decentralized, privacy enabled, mixable stablecoin. It is hard to imagine a better model for a censorship-resistant stable store of value.
This is the type of stablecoin anyone who cares about decentralization should consider adopting. Not all stablecoins are equal.