USD-pegged stablecoin: USDG

The value of fiat-backed stable coins, such as USDT and USDC, is linked to the USD bank deposits, which are susceptible to bank runs and inflation risk due to the steady loss of purchasing power as the Federal Reserve targets a 2% annual inflation rate. Moreover, the realized inflation rate has been higher than this target in recent years. In contrast, gold-backed stable coins address these issues by using gold-backed GLDT tokens as collateral to mint USD-pegged stable coins. This approach offers inflation protection for the collateral since the gold price has tripled in the last two decades, making gold bars a more robust collateral option for minting stable coins.

On the other hand, crypto asset-backed stable coins like Dai rely on cryptocurrencies such as ether as collateral, leading to a high liquidation risk due to the volatile nature of ether’s price. Comparatively, GLDT price is relatively more stable, making gold-backed stable coins a more appealing option in terms of financial stability.

To illustrate, 1 GLDT represents the tokenized ownership of 0.01 gram physical gold. When the price of GLDT exceeds the cost of 0.01g of gold, arbitrageurs can purchase GLD NFT, convert them to GLDT, and sell them for profit. Conversely, if the GLDT price falls below the cost of 0.01g of gold, arbitrageurs can buy GLDT, convert it to GLD NFT, and sell them to profit from the discrepancy. Consequently, market forces work to align the price of GLDT with that of physical gold.

As the market price of GLDT closely mirrors that of physical gold, reflecting its relatively stable value. Consequently, GLDT is an ideal collateral asset. This stability allows us to utilize GLDT to mint a USD-pegged stablecoin, akin to the mechanism employed by Liquity.

The process of creating a Collateralized Debt Position (CDP) and using GLDT as collateral is characterized by instant opening and closing, with a zero fee for CDP initiation and a 1% fee for its closure. The minimum deposit amount of a CDP is 100 GLDT. It is important to note that the parameters pertaining to the fee structure and minimum deposit amount are subject to potential revisions by the Gold DAO.

The governance token of the Gold DAO is denoted as GLDGov, with detailed elucidation provided in the subsequent chapter.

CDP owners, i.e. those who stake GLDT, are privileged with the ability to mint the USD-pegged stable coin USDG against the GLDT collateral within their CDP. The minimum Collateral Ratio (CR) at inception is established at 150%, subject to alteration by the governance DAO. Should the CR decline below 150% but remain above 110%, the CDP owner is precluded from minting additional USDG but may augment their margin or reduce their USDG position.

To preserve the price stability of USDG, a stability pool is instituted where users can stake USDG. Upon a CDP’s CR falling below 110%, the stability pool automatically incinerates an equivalent amount of USDG and seizes the GLDT in the CDP. The distribution of the burned USDG and confiscated GLDT is conducted in a proportional manner.

In a bid to further encourage users to stake USDG in the stability pool, a certain amount of GLDGov tokens are distributed to the stability pool once it is operational.

An additional mechanism to uphold the lower threshold of USDG price is the redemption channel, which allows arbitrageurs to redeem 1 USDG for GLDT equivalent to $1 from the CDPs with the lowest CR. A redemption fee of 0.5% is levied for this service.