Cake Wallet onboards dEURO decentralized stablecoin, offers 10% yield on collateral

Cake Wallet added the decentralized stablecoin dEURO to its offerings on Tuesday, expanding its stable of euro-denominated digital assets for users.

The decentralized stablecoin is overcollateralized by other digital assets, including Bitcoin (BTC), Ether (ETH) and Monero (XMR), meaning that to mint the dEURO stablecoin, users must first deposit other cryptocurrencies as collateral.

Overcollateralizing, or depositing cryptocurrency worth more than the value of the asset being borrowed, acts as a shield against de-pegging events, the dEURO team told Cointelegraph. The dEURO offering also features automatic liquidations, which occur when loan-to-value ratios drop below a certain threshold.

Cake Wallet says users can earn 10% yield from crypto holdings backing the stablecoin, without giving up custody of their funds. The yield is generated from stability fees paid by depositors minting the stablecoin and deposited into an equity reserve pool, a dEURO spokesperson told Cointelegraph.

This helps maintain the stability of the stablecoin and adds liquidity to the user's crypto holdings, allowing them to generate a euro-pegged token without selling their crypto, the spokesperson said.

An illustration of the dEURO minting process. Source: dEURODecentralized and algorithmic stablecoins are promising use cases consistent with the early cypherpunk ethos of the crypto community. However, critics of algorithmic and decentralized stable tokens argue that these assets carry substantial risk, pointing to a history of de-pegging events and token collapses.

Algorithmic and decentralized stablecoins have a habit of de-pegging

Perhaps the most high-profile algorithmic token collapse was the implosion of the Terra-LUNA ecosystem and the de-pegging of UST, the ecosystem's stablecoin, in May 2022.

The algorithmic stablecoin relied on a mint-and-burn mechanism, where users would burn approximately $1 in LUNA tokens to mint roughly $1 in UST.

This approach encouraged arbitragers to take advantage of price discrepancies between LUNA and UST, which was supposed to keep the price of the token pegged to the US dollar.

Despite the theoretical protection provided by arbitrageurs stepping in and correcting price discrepancies in UST, a significant portion of demand for UST came from the lending platform Anchor Protocol, which offered users a 20% yield on UST deposits.

Mass withdrawals from Anchor triggered a cascade of events that caused UST to drop to $0.67 in May 2022, before collapsing entirely to just $0.01.

UST did not feature any collateral backing, unlike other decentralized alternatives such as DAI (DAI) and dEURO, which require users to deposit excess collateral against their loans.

The complete collapse of Terra’s UST stablecoin. Source: CoinMarketCapHowever, backing algorithmic and decentralized stablecoins with excess reserves has not proven to be a panacea for de-pegging events.

Moreover, collateral backing has not been enough to fully protect traditional fiat stablecoins, backed by US debt instruments and bank deposits, from losing their currency pegs.

DAI, the decentralized stablecoin of Sky, formerly MakerDAO, de-pegged in March 2023 after Circle's USD Coin (USDC), which was used as collateral backing for DAI, briefly lost its dollar-peg.

Magazine: Unstablecoins: Depegging, bank runs and other risks loom

• #Blockchain
• #Decentralization
• #Euro
• #Stablecoin
• #DeFi
• #Terra Add reaction