Given the current state of the crypto market, it is rather understable as to why most would be distrusting of stablecoins right now.
Still, this does not mean that crypto enthusiasts should completely give up on stablecoins. With that in mind, the SigmaUSD project is already operational and it hopes to provide a new viable stablecoin option, SigUSD.
What happened to Terra?
Before going any further, it is important to understand what happened with Terra. The project seemed to have all the momentum in the world and was even listed in the top ten cryptocurrencies by market capitalization, so what went wrong?
Simply put, the Terra ecosystem incentivized individuals to sell LUNA for UST when the stablecoin’s price was too high, and to swap their UST for LUNA when the price was too low. By doing this, LUNA’s market capitalization was maintained at more than or equal to UST’s, and UST’s price would thus theoretically be able to stay at $1.
The UST protocol was also centralized in nature and was intended to endure price declines as long as arbitrage between it and LUNA could adequately keep up with the bear market. During the time when it became fairly evident that this was no longer the case, Terra’s CEO began purchasing Bitcoin (BTC) to support the value of UST.
The moral of the story is that decentralization and a prudent monetary policy are critical. All it needed was a huge sell order for UST to start losing its peg. At that point, everyone began losing faith in the initiative and confidence in Terra started to dwindle, as no one wanted to be left ‘holding the bag’, so to speak, which led to a massive sell off and a huge crash in the entire crypto market.
What is SigmaUSD?
After the Terra disaster, the SigmaUSD Protocol hopes to renew faith and confidence in stablecoins once again. The Ergo platform hosts the SigmaUSD protocol, a tried-and-tested initiative backed by empirical research which has succeeded where Terra failed. As such, SigUSD is inherently more stable than other stablecoins such as USDT and of course UST.
SigmaUSD is completely on-chain and non-custodial. That is, there is no person or group of individuals in charge of administering the stablecoin reserve as everything is controlled automatically by a time-tested smart contract and stored on the blockchain. Due to this, there is no possibility of unethical, covert manipulation or human interference either.
Additionally, there is a reserve retained to maintain SigUSD’s value. This is a pool of ERG that has been placed in a smart contract. The pool receives revenue from two sources, namely those who trade ERG for SigUSD and individuals who trade ERG for SigRSV, the reserve token. This pool of ERG serves to over-collateralize the stable asset, SigUSD, while also absorbing ERG volatility. This implies that SigRSV holders bear the majority of the risk, as they are assuming that the value of the reserve pool will rise relative to the stablecoin’s value which is in circulation.
Furthermore, an algorithm maintains the over-collateralization status of the stablecoin by 400 to 800%. It does this by enabling consumers to mint SigUSD if the reserve ratio is greater than 400%. It also computes the value of SigRSV by taking into consideration the overall quantity of ERG in reserve, the amount of SigRSV in circulation, and finally the ERG price. In this way, the risk is moved to reserve holders as they can only redeem their SigRSV for ERG when the reserve ratio is more than 400%, whereas SigUSD holders can redeem their tokens whenever desired.
Essentially, there are various key aspects upon which the project is based, namely decentralization, a reliable monetary policy, and a clearly defined immutable smart contract that outlines its usage. As a result of these designs, SigUSD is a crypto-backed, algorithmic stablecoin that is highly decentralized in nature and is based on the AgeUSD Protocol.
How can it be better than other stablecoins?
Investors are beginning to lose confidence in stablecoins at the moment. SigmaUSD therefore wants to reinvigorate the crypto community as SigUSD is a safer option because it is extremely over collateralized. Token holders can observe the reserve ratio in order to fully comprehend any potential risks before owning it. Perhaps most importantly however, SigUSD is completely decentralized in nature, which gives it an edge over other, more centralized alternatives.
Moreover, while ERG experienced plenty of volatility when it increased to $19 before eventually decreasing to $2, SigUSD was still able to maintain its $1 peg. This is a crucial factor as it means that although ERG experienced drastic price volatility, the SigUSD stablecoin consistently worked and was able to maintain the peg at $1. In this way, SigmaUSD was able to do what its competitors seemingly could not – maintain the stablecoin’s value.
Ultimately though, it is obvious that the crypto sector needs a well-researched, open source stablecoin system that is honest, effective and decentralized. The Ergo platform has therefore gradually been developing strong, safe, and open source features which are sorely needed in this business. Whatever the case may be, a project like SigmaUSD would not have failed the industry in the same way that Terra did. SigUSD may have been overlooked in the past but no longer, as the key fundamentals of strong research, reliable testing, and open source work are certainly better than anything that’s based purely on hype and not much else.