Tethered Assets

An innovative asset category.

Introduction to Tethered Assets

Tethered Assets are designed to track the price of a specific reference asset, such as the US Dollar. They achieve this through stabilization strategies, including over-collateralization - where more value is held as collateral than the value of the assets issued - and the support of secondary market liquidity pools. This approach is intended to cause the value of the Tethered Asset to remain steady and close to its reference asset's value.

Over-collateralization

Over-collateralization is a key safety feature in the world of tethered assets. It works like a cushion, locking up more value than the amount of digital currency being created. Here's how it works: Users put in a larger value of collateral (like XAU₮) than the value of digital currency they want to create. This extra collateral serves as a safety net, absorbing potential fluctuations in the value of the collateral asset.

The journey of a Tethered Asset: From Collateral to Utility

• Depositing collateral: To start, a user secures a certain amount of collateral (e.g. Tether Gold) into a smart contract. This process is the first step towards building a 'Collateral Minted Position' or CMP.

• Minting the Tethered Asset: With this collateral in place, the user can now create a specific amount of Tethered Assets, based on a predefined minimum collateral-to-asset ratio known as the Liquidation Point. Once these assets are minted the CMP can be calculated. As the value of the collateral changes, new collateral is added, new Tethered Assets are created or “minted”, and Tethered Assets are returned, the CMP is calculated and recalculated by the smart contract.

• Using Your Tethered Asset: Once minted, these assets are ready in the user's wallet for various uses - from spending to saving.

• Overcollateralization: To mint these assets, users need to deposit more collateral than the value they wish to create. This extra collateral acts as a protective buffer for the stability of the Tethered Asset.

• Liquidation threshold: Should the collateral's value drop below a set level (the liquidation threshold), the collateral could be liquidated. Here, specialised actors (liquidators) step in to buy the collateral at a small discount using Tethered Assets. The liquidators help keep the collateralization ratio intact and contribute to the stability of the Tethered Assets.

Overcollateralization acts as a safeguard against the unpredictable nature of markets. By requiring more collateral than the value of the Tethered Assets minted, this approach is intended to cause the assets to remain well-supported and stable, even amid market ups and downs. This stability is vital for the asset's utility in the ecosystem. Additionally, the Tethered Asset system is designed for versatility. It allows for the creation of various denominations of assets, each backed by either a mix of different collaterals or a single type, adding to its adaptability and appeal.

Secondary Market Liquidity

Tethered Assets are intended to be available to be bought and sold in secondary markets at the same time they can be minted and returned directly with the smart contract. Where there is a difference between the market price of a Tethered Asset and the price that the price oracle maintains for that Tethered Asset, a strategic opportunity known as arbitrage exists.

Reference Price Stability in Tethered Assets: Understanding Arbitrage Dynamics

The following examples relate to the aUSD₮ Tethered Asset and help illustrate the market forces that are expected to keep the price of Tethered Assets relatively stable.

• In Under-Peg Scenarios: if the aUSD₮ Tethered Asset's market price drops below 1 USD, it creates an opportunity for users who need to return aUSD₮ to release their collateral. The aUSD₮ smart contract will value aUSD₮ at 1 USD so they can buy aUSD₮ at this discounted rate and get credit at a value of 1 USD that can be used to free-up their collateral (increasing their collateralization ratio or allowing them to take a return of their collateral).

• In Over-Peg Scenarios: when the aUSD₮ Tethered Asset's value exceeds 1 USD, it motivates new users to mint aUSD₮ and sell it for more than 1 USD. This action helps balance the supply and pulls the price back down to its intended level.

These mechanisms are rooted in the fundamental design of the Tethered Asset's smart contracts, which always equate the minted asset's value to its reference price, helping bring consistency and stability to its valuation in the market.