Cosmos Interchain Stablecoin: Comdex’sStablecoin called Composite ($CMST).

Understanding Volatility

Volatility has to do with a measure of how much the price of an asset has moved up or down over a period of time. Generally, volatility of an asset can be viewed in two ways, that is, there’s a potential for volatile assets to offer either higher returns or higher losses over shorter periods of time than the less volatile assets. Normally, investors will take on a high level of risk if they believe the potential reward is worth the possibility of losing some of their investment. Again, if cryptocurrencies are to be considered as payment systems, there is a problem of high volatility which plagues the blockchain technology making them most times ineffective for payments as there can be a drastic change in price, and very quickly. With this in mind, businesses employing crypto assets as medium of payment might suffer loss rather quickly, hence there’s a need for a hedge in terms of price stability. This led to the development of stablecoins.

Stablecoins are cryptocurrencies whose values are pegged to another currency, commodity, or financial instrument. As explained in our previous discussion, Stablecoins aim to provide an alternative to the high volatility cryptocurrency assets.

Stablecoins are typically categorised into collateralized and algorithmic backed stablecoins and further identifiable by one of four underlying collateral structures:

  • Fiat-backed
  • Crypto-backed
  • Commodity-backed
  • Algorithmic-backed

While underlying collateral structures can vary, the aim, ofcourse, is for stablecoins to provide safe haven against volatile assets.

The most important factor in evaluating stablecoins is how well they maintain their pegs. Collateralized stablecoins require liquid assets, assets that can quickly be traded, in order to respond to changes in supply and demand. Algorithmic stablecoins do not use collateral, instead relying on smart contracts, hypothetically yielding infinite liquidity.

Fiat collateral or backed stablecoins usually are kept in reserve with a central issuer or financial institution, and must remain proportionate to the number of stablecoin tokens in circulation. For instance, if an issuer has $50 million of fiat currency, it can only distribute $50 million stablecoins, each worth one dollar. Some of the known stablecoins in this category by market value include Tether (USDT), the Gemini Dollar (GUSD), True USD (TUSD), and Paxos Standard (PAX).

Crypto-collateralized stablecoins are backed by another cryptocurrency as collateral. This process occurs on-chain and employs smart contracts instead of relying on a central issuer. When purchasing this kind of stablecoin, the cryptocurrency is locked into a smart contract to obtain tokens of equal representative value. You can then put this stablecoin back into the same smart contract to withdraw the original collateral amount.

Algorithmic stablecoins do not use fiat or cryptocurrency as collateral. Instead, their price stability results from the use of specialized algorithms and smart contracts that manage the supply of tokens in circulation. An algorithmic stablecoin system will reduce the number of tokens in circulation when the market price falls below the price of the fiat currency it tracks. Alternatively, if the price of the token exceeds the price of the fiat currency it tracks, new tokens enter into circulation to adjust the stablecoin value downward.

Commodity-backed stablecoins are collateralized using physical assets like precious metals, oil, and real estate.
The most popular commodity to be collateralized is gold; Tether Gold (XAUT) and Paxos Gold (PAXG) are two of the most liquid gold-backed stablecoins. However, it is important to remember that these commodities can, and are more likely to, fluctuate in price and therefore have the potential to lose value.

Composite Stablecoin ($CMST) mechanism is designed to be the most reliable model for stablecoins, which is a stablecoin that is overcollateralized and decentralised. $CMST follows a robust model inspired by MakerDao’s $DAI and is backed by multiple interchain assets allowing deeper liquidity and avoiding dependency on a single asset. $CMST aims to serve as Cosmos’s interchain stablecoin. Cosmos-based chains facilitate transactions with speed, efficiency, and cheapness, making stablecoin transactions on these chains more efficient than on alternative networks.

Stablecoins have helped further utility in DeFi ecosystems, enabling users to hedge, leverage, and earn yield from lending and liquidity provision.

Overcollateralization is used to define the situation where an asset (or assets) value used as collateral on a loan exceeds the loan value. It is commonly used by borrowers to reduce credit risk for the creditor and enhance the loan’s credit rating and $CMST fits in properly here.

$CMST as an overcollateralized stablecoins, facilitates liquidity creation while allowing users to maintain long exposure to their collateral assets. With the newly minted $CMST liquidity, users can lever up their collateral assets by using newly minted $CMST to take additional exposure on the collateral asset.

Alternatively, newly minted $CMST can be used for additional exposure on alternative assets. For investors who opt to maintain a portion of investments in stable assets, yield generated from DEX liquidity provision and lending adds further utility to holding stablecoins.

About Comdex

Comdex develops possible solutions for the decentralization of finance (DeFi) and the democratization of commodities by handing investors the knowledge of a widened scope of asset classes with rewarding features.

For more information, and to stay connected with Comdex, you can use the links below:







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