What is a stablecoin?#
It is a derivate product. This derivative intends to create a way to stabilise volatility.
Price stability is a critical part of finance; without it, it becomes difficult to create long-term financial product modellings. Investment takes a risk; a good business requires modelling and forecasting to estimate profitability, whether on-chain or off.
The crypto space, by nature, is highly volatile. SigmaUSD and SigmaRSV are mechanisms to create stable value, and stable value is the foundation for a prosperous economy.
Derivatives were created to minimise volatility when trading in foreign currencies.
In a globalised economy, the shift in purchasing power of one currency vs another can be a highly destructive force. Instability disrupts trade and destroys business models.
Stability comes at a cost. Instability in price is often added as a premium, sometimes a price premium, and other times an interest premium.
The cost of SigmaUSD is the current USD value of ERG plus a 2.5% fee.
This is a low premium, 2.5%.
What is your current interest rate? What is the rate at which a bank will collateralise an asset you hold and offer a loan?
Very few have access to this low premium in the global economy, and the bank may not offer liquidity with little to no reserve.
SigmaUSD allows anyone who owns ERG to collateralise their ERG and create liquid value. What does this mean?
The long-term goal will be to create use cases for this stablecoin that offers a return beyond this 2.5% fee.
When Dapps and use/utility are in place that supersedes this 2.5% fee, magic happens.
A user can take their ERG, create SigmaUSD, and then use that to create a return greater than the 2.5% cost of stability. Most business models rely on stability and price/risk prediction rather than asset speculation.
SigmaUSD is not just an opportunity to take a short position on ERG. Rather it is a way to use your reserve value to generate yield. Defi on Ergo delivers additional gateways, decentralised exchanges, or ergo swap liquidity pools, allowing growth opportunities for this stable value.No economy can function properly with high price volatility. A stable, robust decentralised economy requires a stable and robust mechanism currency. Ideally, a currency backed by a reserve asset ensures its value.
Once the 2.5% cost of stability is overcome, the dynamic of the SigmaRSV will change dramatically. Users have an incentive to continually mint/redeem SigmaUSD. Perhaps the value of ERG will go up, and a user may have missed some price appreciation; however, if they overcome the 2.5% threshold, the user will have a net USD gain.
Using stable value as the medium to invest and overcoming the 2.5% threshold generates returns, transforming a short into a way to create value from stability.
Imagine the following scenarios.
- A User chooses stability for a 2.5% premium.
- Even if the price of ERG appreciates, the user can net again. They will have less redeemable ERG, but growth is growth. They end with a larger position in USD.
- Perhaps ERG's value goes down; the stable value is used to create a net USD gain. The stable value can be redeemed for a larger ERG position upon redemption. Not only did they grow their position in USD, but they grew their position in ERG as well.
- When SigmaUSD becomes a pathway of generative value beyond a short, it incentivises users to interact with the AgeUSD protocol on ERG.
- This result will be a healthy reserve system that nets growth through interaction and exchange.
At this point, expect appreciation in SigmaRSV. Expect the treasury to grow.
This is the major barrier to overcome, the 2.5% fee.
All things being equal, this is a very low barrier to success.