What is a Tethered Asset?

Tethered assets, also known as stablecoins, are digital tokens designed to maintain a stable value by tracking the price of various reference assets, such as the United States dollar. These assets can be backed by a variety of collateral types, including gold, specific fiat currencies, or a diversified portfolio of assets, which provides flexibility and enhanced risk management options. This allows tethered assets to track the prices of major fiat currencies like the U.S. dollar or euro, commodities such as gold, oil, and wheat, or even other financial instruments like stocks or bonds.

To maintain their peg to the underlying asset, tethered assets utilize mechanisms such as overcollateralization and liquidity pools in secondary markets. By holding reserves that exceed the value of the issued assets and ensuring smooth trading, these strategies aim to stabilize the value of the tethered asset, closely aligning it with its reference asset.

A prominent example of a tethered asset is Tether (USDT), which claims its reserves match the quantity of USDT in circulation, aiming to maintain a 1:1 peg with the U.S. dollar. Despite its growth, Tether has faced scrutiny and regulatory challenges due to occasional depegging events.

To address these issues, Tether undergoes independent attestations to verify its reserves. In April 2024, Tether completed a System and Organization Controls 2 (SOC) audit, the highest level of security compliance, and publishes quarterly reports detailing its reserves and asset composition to enhance operational transparency.

Alloy (aUSD₮) by Tether Explained

Alloy (aUSD₮) by Tether is a digital asset that leverages Tether Gold (XAU₮) as collateral to provide stability, using EVM-compatible smart contracts. It is the first Alloy by Tether designed to track the U.S. dollar using Tether Gold as collateral. Minted via Ethereum Virtual Machine (EVM)-compatible smart contracts, aUSD₮ integrates seamlessly within the Ethereum ecosystem and its compatible blockchains.

Using Tether Gold (XAU₮) as collateral, Alloy by Tether combines the stability and low volatility of gold, a traditional store of value. XAU₮ is an ERC-20 token representing one troy ounce (31.1 grams) of gold stored in a Switzerland vault on behalf of Tether Gold tokenholders.

Licensing and Interaction

Alloy by Tether is a technological platform utilizing smart contracts. However, the National Commission of Digital Assets (CNAD) in El Salvador authorizes Moon Gold NA, S.A. de C.V., and Moon Gold El Salvador, S.A. de C.V. to manage aUSD₮ issuance.

Users can interact with Alloy by Tether smart contracts via the platform’s web interface at alloy.tether.to, where they can mint and redeem aUSD₮ using XAU₮. Technical users can interact directly with the contracts using specialized tools. Only verified Ethereum addresses that have completed Know Your Customer (KYC) checks can engage with these smart contracts.

How Alloy (aUSD₮) Works

AUSD₮ combines the stability of the U.S. dollar with the value-preserving characteristics of gold. Three core components of aUSD₮'s functionality include overcollateralization, vaults, and a liquidation mechanism.

• Overcollateralization. AUSD₮ is overcollateralized, meaning it is backed by a greater value of Tether Gold (XAU₮) than its face value. This buffer protects aUSD₮ from potential gold price fluctuations. Users must deposit more collateral than the aUSD₮ value they intend to mint, determined by a collateral-to-asset ratio known as the liquidation point.

• Alloy by Tether Vaults. Vaults, core smart contracts compatible with Ethereum, are used to mint and manage aUSD₮. They facilitate independent and permissionless verification of XAU₮ collateral backing aUSD₮. Vaults store user collateral, unissued aUSD₮, and other critical data. Only KYC-verified addresses can interact with the vaults and mint aUSD₮.

• Liquidation of Collateral. Liquidation occurs when the collateral's value backing a minted amount falls below a certain threshold. Each CMP (collateralized minted position) has a liquidation point of 75%. If a position nears liquidation, authorized liquidators intervene to reclaim the user’s XAU₮ and return a corresponding amount of aUSD₮, ensuring system solvency.

Acquiring Alloy (aUSD₮)

Users can obtain aUSD₮ by depositing XAU₮ into the aUSD₮ smart contract or trading it on exchanges like Bitfinex. Fees apply for minting, returning, and liquidating aUSD₮. These include a mint fee of 25 basis points (bps), a return fee of 25 bps, and a liquidation fee of 75 bps.

Advantages of aUSD₮

AUSD₮ offers stability through its U.S. dollar peg and gold backing and transparency via auditable smart contracts. This reduces the volatility typically associated with cryptocurrencies and provides a reliable store of value. Its integration with the Ethereum ecosystem and overcollateralization model further enhances yield generation and interoperability with decentralized finance (DeFi) platforms.

Comparing Tether’s Fiat-Pegged Tokens, Tether Gold Tokens, and Alloy by Tether

USDT is a stablecoin pegged to the U.S. dollar, XAU₮ is a gold-backed token, and aUSD₮ is a stablecoin pegged to the U.S. dollar but backed by Tether Gold. Each serves different purposes: USDT for everyday transactions, XAU₮ for gold exposure, and aUSD₮ for combining dollar stability with gold security and potential yield generation.

Tether's fiat-pegged tokens (USD₮) vs. Tether Gold tokens (XAU₮), vs. Alloy by Tether (aUSD₮)

	Tether's fiat-pegged tokens (like USD₮)	Tether Gold tokens (XAU₮)	Alloy by Tether (aUSD₮)
Collateral	Fiat currency	Physical gold	Tether Gold (XAU₮)
Stability mechanism	Reserves	Gold price	Overcollateralization
Use cases	Everyday transactions and trading	Store of value, investment	Payments, investment
Potential risks	Regulatory, depegging events	Gold price volatility	Smart contract risk, liquidation risk

Retrieving XAU₮ Deposited as Collateral

To retrieve XAU₮, users must ensure their MTV ratio stays below 75%. Withdrawal requests exceeding this ratio will be denied. Users may need to return a portion of their minted aUSD₮ before making a withdrawal to maintain the required ratio. Repurchasing aUSD₮ on the secondary market might be necessary to cover deficits due to fees incurred during minting and returning.

In summary, tethered assets like Alloy (aUSD₮) by Tether offer a blend of stability, security, and transparency, leveraging both traditional assets like gold and modern blockchain technology.