The NEAR-native stablecoin: USN

For Day 5 of my NEAR-related blogs, I’ll be looking at the NEAR native stablecoin: USN

Stablecoins are a safe haven for traders and are said to combine the stability of traditional fiat money with the benefits of digital assets, such as ease of transaction, transparency, and lower fees.

Despite the collapse of Terra’s native stablecoin $UST, overall stablecoin volumes have been growing quietly, with Circle’s USD now boasting a marketcap of over 54 billion. It’s important to point out that Terra was a so-called algorithmic stablecoin, whereas most stablecoins with high volumes are centralized.

Centralized vs. decentralized stablecoins

We can broadly categorize stablecoins into centralized coins, such as USDC, USDT, or BUSD, where one issuer deposits $1 worth of money into a bank account for every 1$ worth of stablecoin minted.

It’s efficient but less transparent, as private companies hold the backing.

Decentralized stablecoins, on the other hand, let anyone mint more stablecoin by depositing crypto as collateral into a smart contract. The most famous example here is $DAI by Maker. The downside here is that they require one to over-collateralize one’s loan. Not a capital-efficient thing to do.

I’ve written quite a bit on the differences between these types of stablecoins, so if you want to dive deeper, you can do so here or here if you’re interested in Maker.

Algorithmic stablecoins

The third breed of stablecoins are algorithmic stablecoins, that don’t rely on any on-or off-chain collateral and achieve stability through algorithms that manage their supply. UST was such a stablecoin that it was supposed to be kept stable by arbitrage, and the price of LUNA. We can safely say, that didn’t work out so well.

What does all of this have to do with $USN? It’s good to understand what type of stablecoins exist, to understand what Decentral bank, the entity behind USN, has created.

How does $USN work?

USN is a NEAR native stablecoin pegged to the US dollar. It provides users with fast transactions, low costs, and stability. It is a product launched by Decentral Bank, a DAO that can vote on treasury management, principles, and more.

Treasury management itself is managed through sophisticated algorithms and is entirely automated.

At launch

The core stabilization mechanism of USN was based on smart contracts allowing anyone to swap 1 $USN for $1 worth of NEAR at any time. Whenever $USN traded below or above its peg, an arbitrage opportunity would arise, which arbitrageurs would exploit, bringing the price back to the peg.

Decentral bank has adopted a conservative collateral strategy, which had them bootstrap the $USN supply with double-collateralization. That means that they used two assets as collateral, $1 billion worth of USDT and 1 billion worth of NEAR.

Any newly created $USN would be backed by NEAR, and in theory, the stablecoin held in reserve should be sufficient to buy back the entire $USN supply to avoid a death spiral.

USN relies on a currency board system, which is basically a monetary authority in charge of maintaining a fixed exchange rate. Whenever USN is minted or burned, the supply in the reserve funds increases or decreases correspondingly.

$USN minting has been live since April 25th. Before the collapse of UST.

In the aftermath of the collapse, Decentral Bank voted to make changes to $USN.

USN 2.0

After going through a set of simulations, the DAO voted to implement a more flexible model that could adapt better to adverse market conditions. Therefore, they decided to now back $USN 1:1 with USDT, stating uncertainties over the length of the bear market and broader macro conditions such as a looming recession. The change was implemented on June 30th.

Overall, this change is aimed at making $USN more stable and reducing the risk of under collateralization. In the future, they’re planning to add non-stable collateral again.

The team is also planning to add further futures such as a public dashboard, fiat on- and off-ramps, integration of $USN into various NEAr dApps, and more.

$USN is a great way to “flee” volatility when operating in the NEAR ecosystem. However, now that it’s 1:1 backed with USDT personally, it feels more like getting a wrapped $USDT than an actual “new” stablecoin.

But the team has plans for the future to increase utility, and I certainly do appreciate them adjusting to market conditions to ensure that a death spiral is a highly unlikely scenario. The more dapps one can use $USN in (as opposed to $USDT), the more it makes sense to have it.