Stablecoins have seen their fair share of hype during bear markets, and they’ve certainly helped traders preserve their gains. Most stablecoins so far have been pegged to some kind of asset in the real world, from commodities to national currency to a basket of other assets. Very few qualify as decentralized stablecoins, which derive their value from other digital assets.
EOSDT is the first decentralized stablecoin on the EOS blockchain, and it’s built on a framework of decentralized finance smart contracts called Equilibrium. EOS is a strong choice of blockchain to develop for because of its speed, scalability, near-zero transaction fees, and cross-chain compatibility. EOSDT maintains a soft peg to the USD, meaning 1 EOSDT is always worth $1.
The EOSDT stablecoin grants traders access to price-stable liquidity against the collateral of their volatile digital assets at a rate as low as 1% APR. EOSDT enters the circulation when users lock up their EOS holdings in Equilibrium’s smart contract. Equilibrium has a user-friendly self-service gateway that makes it easy for anyone to lock up their EOS holdings to create EOSDT (this will work with other cryptocurrencies in the future).
EOSDT uses over-collateralization in order to maintain its peg to the US dollar. The platform initially launched with a 170% collateralization threshold, but that was changed to just 130% in October 2019. In other words, generating 100 EOSDT calls for traders to lock up at least 1.3 times that amount of EOS or more.
This entire process is recorded on the blockchain, so anyone can confirm the locked up EOS at any time. Unlike in centralized platforms, all funds are managed by the equilibrium smart contracts which ensure over-collateralization at all times and maintain the $1-peg.
DeFi companies face a big challenge when it comes to receiving reliable price data. That’s why the EOSDT system is connected to two oracles (Provable and Delphi Oracle) to monitor the state of the market.
No matter how overcollateralized a stablecoin is, you might still wonder how it maintains a $1 peg. There are several mechanisms that make it happen.
One of these is the liquidation of undercollateralized EOSDT positions. Position holders are incentivized to keep their position overcollateralized because as soon as their EOS holdings fall below the minimum 130% threshold, their position gets liquidated and they get dinged with a 15% liquidation fee. Position holders can either add more collateral or pay back some of their EOSDT to avoid such situations.
There are also players in the game who benefit from arbitrage opportunities when EOSDT deviates from its peg. These so-called “guardians” will create more EOSDT when the peg rises above $1, increasing the supply and bringing the price back down to $1. They are similarly incentivized to buy more EOSDT (paying back their positions) when the price drops below $1. This increases demand and drives the price back up to $1.
It’s worth mentioning that Equilibrium put up its own stability fund of EOS worth some $22.5 million at the time of this writing. This fund serves as a figurative insurance mechanism for EOSDT position holders, ensuring that the system remains stable in case of a black swan market event.
But traders are probably more interested in what they can actually use EOSDT for. Here are some possible scenarios.
Suppose you’re very bullish on EOS. You could put up 1,000 EOS to open a position for 1,000 EOSDT. Then you could use that EOSDT to buy $1,000 EOS (or any other crypto that you feel like trading). If your prediction is correct and EOS goes up 50%, you will have made $500 after paying back the 1,000 EOSDT and 1% admin fee. When you close your position, you’ll have an extra $500 in EOS (its value increased while it was locked up). EOSDT is completely useful for leverage!
In the case of opening a leveraged position in EOS, you can actually generate EOSDT multiple times. As soon as you buy more EOS, you can lock it up as additional collateral, generating more EOSDT to use for buying more EOS. This process can be repeated multiple times. You will eventually get a heavily leveraged long position in EOS with a margin of around 4x. This means EOSDT is also useful for a trading strategy called “pyramiding.”
EOSDT also enables passive income opportunities with the rewards that EOS block producers pay and the EOS resource exchange (REX), which is also integrated into the Equilibrium ecosystem. On the REX marketplace, EOS holders can lend their EOS or EOSDT to the system, earning fees on that stake whenever others borrow it. The system also stakes EOS collateral for block producers in a riskless way. The EOSDT community selects their favourite EOS block producers, and the chosen BPs distribute rewards to the users who initially provided EOS collateral then.
All in all, EOSDT has built a compelling decentralized system to create an EOS-based stablecoin — this introduction barely scrapes the surface.