AUDD Stablecoin Guide: Clarifying the Common Misconceptions
22 Jan, 2024
By Michaela Juric, Head of Blockchain and Digital Assets
Welcome to the AUDD Stablecoin Guide, where we demystify Australia’s premier stablecoin pegged to the Australian Dollar (AUD). This post addresses some of the community’s concerns and clarifies AUDD’s misconceptions. Ensuring our users and stakeholders fully understand this innovative financial tool’s stability, security, and utility.
AUDD Stablecoin Guide Part 1: How is AUDD created?
AUDD isn’t just a digital currency; it’s a direct reflection of the Australian dollar. Every AUDD circulating in the digital sphere has an exact one-dollar counterpart held in reserve in a bank account. This 1:1 pegging is the cornerstone of AUDD’s reliability, ensuring that each AUDD token you hold is as good as having an AUD in your pocket.
In saying this, AUDD is not simply created out of thin air – it first needs to be ‘minted’. Every new AUDD token on the blockchain comes into existence only when an equivalent amount of AUD is deposited with us. Upon receiving these funds, we mint and credit an equal amount of AUDD to the user’s account.
The basics: Buying and selling
Use our platform, AUDD Digital, as an example. Once a user signs up for an AUDD Digital wallet, they can fund this using their bank account by paying via bank transfer or PayID. Once the payment has been credited, users can use this balance to swap into AUDD and vice versa.
Similarly, to sell AUDD for Australian Dollars, we must destroy the AUDD to reflect the new reserve bank account balance. This process is known as ‘burning’ and results in the equivalent amount of AUDD being removed from the blockchain.
These functions – minting and burning – ultimately control the amount of AUDD, commonly called ‘circulating supply’.
This meticulous approach sets AUDD apart from some other stablecoins in the market. While certain stablecoins issue tokens against loans or other cryptocurrencies, AUDD strictly adheres to a real money-backing principle. No AUDD is minted without a corresponding AUD deposit, ensuring absolute transparency and reliability in our stablecoin’s value.
Liquidity in the marketplace
The circulating supply of a token on the blockchain does not necessarily mean that all of it is for sale. There could be 100 million AUDD in circulation, but if it is all held by a select few people, and they decide not to sell any of it, then there would be no availability of AUDD to buy it in the market.
This is known as ‘liquidity’ and determines how much AUDD is available for sale (or purchase) in the market. A highly liquid market concludes that there is plenty of AUDD available to buy and sell. However, a market with lower liquidity means limited AUDD to buy and sell. You could regard AUDD Digital as a ‘highly liquid’ marketplace – it can buy and sell mass amounts of AUDD for Australian Dollars. But this blog post will focus on other markets where you might find AUDD available – known as ‘DEXs’.
AUDD Stablecoin Guide Part 2: AUDD and DEXs
Decentralised Exchanges (DEXs) represent a pivotal part of the cryptocurrency world. Unlike traditional exchanges, DEXs operate without a central authority, offering a platform for peer-to-peer trading. This model ensures transparency and gives users complete control over their assets. However, this also means that the liquidity – the ease with which assets can be bought and sold without affecting the market price – depends entirely on the users themselves.
User activities directly influence the presence and liquidity of AUDD on DEXs. This includes users who buy AUDD with Australian Dollars or those who wish to trade other cryptocurrencies for AUDD. It’s a dynamic environment where the supply and demand of AUDD are in the hands of its community.
Factors Affecting AUDD Liquidity on DEXs
Several factors contribute to the variation in liquidity on different DEXs:
- User Preference: Users may prefer certain DEXs over others based on ease of use, trust, or available trading pairs.
- Geographic Distribution: The user base of AUDD might be more active on specific platforms due to geographical preferences or regulatory considerations.
- Market Trends: General market trends and the popularity of certain cryptocurrencies can shift the focus of trading activities, indirectly affecting the liquidity of AUDD.
- Blockchain Compatibility: AUDD is currently available on three Blockchains – Stellar, XRP Ledger, and Ethereum. A DEX’s supported Blockchain technology ultimately determines AUDD’s availability on it.
To tackle the issue of varying liquidity, many DEXs offer liquidity pools. These are essentially reserves of different tokens that users can contribute to, facilitating smoother trades and ensuring better price stability. By participating in a liquidity pool, users help maintain the market’s health and earn rewards for their contributions. You can read more about liquidity pools in one of our previous blog posts. While AUDD might not always show high volumes on DEXs, it’s essential to understand that this does not reflect its overall trading activity or stability. AUDD is actively used in various use cases and services outside DEXs, like Ainslie and Zerocap. Services such as these allow users to buy or sell other cryptocurrencies using AUDD – regardless of what is available on the DEX – demonstrating its utility and acceptance in the broader crypto market.
Price Stability of AUDD
While the world of DEXs is vibrant and ever-changing, low liquidity in such a marketplace can impact the price of AUDD. This raises questions among users about whether 1 AUDD is ‘truly’ worth AU $ 1. Let’s demystify this:
- The Essence of DEXs: DEXs operate independently, with prices determined by immediate supply and demand. This contrasts with centralised systems, where prices are often more stable and controlled.
- Impact of Trading Activities: When a user trades AUDD for another cryptocurrency on a DEX, the transaction’s specifics – such as urgency, amount, and market conditions at that moment – can influence the price.
- The Ripple Effect on Reported Prices: These isolated transactions can slightly skew the price reported by platforms. It’s a ripple effect – a slight change in one place can create a more significant impact elsewhere.
For instance, if someone urgently needs to buy Ethereum with AUDD on Uniswap and is willing to pay a little extra (say, 2%), this raises AUDD’s price against Ethereum, by 2%.
Because of this, it is essential to understand the difference between the prices on DEXs and a centralised source, such as AUDD Digital. DEX Prices reflect immediate market dynamics. A high demand for AUDD against another crypto might temporarily hike its price or vice versa. Conversely, on the AUDD Digital platform, AUDD maintains its 1:1 peg with the AUD, unaffected by the speculative trading that can occur on DEXs.
Deciphering Price Variations
Now, you may be wondering, it’s not quite accurate to compare the price of one market to a completely different one – an AUD: AUDD market would be much more stable than an AUDD: ETH market. So why does it matter?
To answer this, we must look at the role of price tracking services – like CoinGecko – that recently introduced AUDD as a tracked asset. Services like CoinGecko play a vital role in the crypto ecosystem. They offer a bird’s-eye view of the market by aggregating prices from various sources, including DEXs.
However, it’s important to flag that even these services have limitations. While CoinGecko captures the AUDD market at any given moment – including those price variances on the DEX – it does not always reflect the complete picture. As you may see from AUDD’s profile on CoinGecko, it only tracks a small number of DEXs, including UniSwap, Pancakeswap, SushiSwap, and StellarTerm. It does not track, and therefore, cannot see that AUDD Digital is buying and selling AUDD 1:1 with Australian Dollars or the price that Ainslie or Zerocap buy or sell their cryptocurrencies for when trading AUDD.
So, if we refer back to our previous example of someone purchasing Ethereum for 2% above the market price, CoinGecko would calculate this as AUDD worth 2% less than AU$1 – or AU$0.98. This is because CoinGecko would compare this rate to another source; for example, CoinGecko may determine the value of 1 Australian Dollar by converting USD to AUD. Then, it would compare the AUDD: ETH rate to the USD: ETH rate. Because the AUDD: ETH rate is 2% more, CoinGecko then assumes that 1 AUDD is equal to AU$0.98 because of the USD: ETH market!
AUDD Stablecoin Guide Part 3: Conclusion
DEXs’ decentralised nature may cause short-term AUDD price variations, typical in the dynamic crypto market. But for AUDD, our commitment remains firm. We aim to provide a stablecoin that consistently holds its value at 1 AUD, unaffected by the short-term fluctuations seen in decentralised trading platforms and smaller markets. In addition to motivating our readers to understand these market dynamics, we also want to encourage you to take advantage of AUDD Digital’s stability for your transactions outside of these environments. We hope this AUDD Stablecoin Guide has provided valuable insights.
Sign up for your AUDD Digital account today at https://get.audd.digital.
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- provided for informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose;
- not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice; and
- general in nature and is not specific to you or anyone else.
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