Author: Dilip Kumar Patairya, CoinTelegraph; Translated by: Tao Zhu, Golden Finance

1. What are Tether assets?

Tether assets are a general term for a class of multi-purpose digital tokens designed to track the prices of various reference assets (such as the US dollar).

Tether assets, also known as stablecoins, can be backed by a single type of collateral (e.g., gold, a specific fiat currency) or a diversified portfolio of multiple assets, providing greater flexibility and risk management options. This flexibility enables these assets to track the prices of a variety of assets, including major fiat currencies such as the U.S. dollar or the euro, commodities such as gold, oil, and wheat, and even other financial instruments such as stocks or bonds.

Restricted assets maintain their pegs to the underlying assets through various mechanisms, typically combining overcollateralization with strong liquidity pools in the secondary market. These strategies aim to keep the value of Tether-backed assets closely aligned with their reference assets by holding reserves that exceed the value of issued assets and ensuring smooth secondary market trading.

A well-known example of a tethered asset is Tether (USDT), which claims that its reserves match the amount of USDT in circulation. It aims to maintain a 1:1 peg with the US dollar. Despite its growth, Tether has faced scrutiny and regulatory challenges due to the depegging incident.

To address such issues, Tether regularly conducts independent attestations to verify its reserves in response to regulatory scrutiny. In April 2024, Tether completed a System and Organization Control 2 (SOC) audit, the highest level of security compliance. In addition, it publishes quarterly reports detailing its reserves and asset composition to increase transparency in its operations.

2. Explanation of Tether’s Alloy (aUSD₮)

Tether’s Alloy (aUSD₮) is minted using EVM-compatible smart contracts and leverages Tether Gold (XAU₮), a digital representation of physical gold, for stability.

AUSD₮ is Tether’s first product designed to track the U.S. dollar using Tether Gold as collateral. It is minted using Ethereum Virtual Machine (EVM)-compatible smart contracts, allowing for interoperability and integration within the wider Ethereum ecosystem and its various compatible blockchains.

Alloy uses Tether Gold (XAU₮) as collateral, positioning itself as a digital asset built on the stability and scarcity of gold, a traditional store of value known for its low volatility. XAU₮ is an ERC-20 token that is equivalent to one troy ounce (31.1 grams) of gold on the Ethereum blockchain. Each blockchain address holding XAU₮ is linked to real gold stored in a Swiss vault on behalf of Tether Gold token holders.

But is Alloy licensed in any jurisdiction? Tether’s Alloy is a technology platform that utilizes smart contracts. However, the El Salvador National Digital Asset Commission (CNAD) authorized Moon Gold NA, S.A. de C.V. and Moon Gold El Salvador, S.A. de C.V. to handle the issuance and management of aUSD₮.

How to interact with Alloy smart contracts?

The Alloy smart contracts are accessible through the platform’s user-friendly web interface, which allows users to mint and redeem aUSD₮ using XAU₮. The web interface is easily accessible at Alloy.tether.to.

Technically proficient individuals can interact with the contracts directly using specialized tools. It is important to note that only verified Ethereum addresses that have completed Know Your Customer (KYC) checks can use these smart contracts. More information is available through Tether Alloy’s front-end documentation.

3. How does Alloy (aUSD₮) work?

AUSD₮ has the value-preserving properties of gold as a stable unit of account. The three core principles of aUSD₮’s functionality are overcollateralization, vaults, and their liquidation mechanisms:

Overcollateralization

A key feature of aUSD₮ is overcollateralization. AUSD₮ tokens are backed by Tether Gold (XAU₮) worth more than their face value. This surplus XAU₮ acts as a buffer, protecting the stability of aUSD₮ from potential fluctuations in the price of gold. This means that users must deposit a larger collateral than the value of aUSD₮ they intend to mint.

By locking a specified amount of Tether Gold into a smart contract, a user can mint a corresponding amount of aUSD₮. The maximum aUSD₮ a person can mint is determined by the ratio of collateral to assets, known as the liquidation point.

Tether Vaults 的Alloy

Core Ethereum-compatible smart contracts, called Vaults, are used to mint and manage aUSD₮. These smart contracts facilitate independent and permissionless verification of the XAU₮ collateral backing the circulation of aUSD₮.

Vaults play multiple roles in the USD₮ ecosystem:

• Storing users’ collateral;

• Storing unissued aUSD₮;

• Store users’ collateral minting position (CMP) information;

• Storage address metrics such as aUSD₮ minted, XAU₮ supplied, and the Mint to Value (MTV) ratio of the position.

Only addresses that have successfully completed the KYC verification process can interact with the vault and mint aUSD₮. These verified addresses are whitelisted for the minting process.

The vault uses this data to assess the solvency of the position. If liquidation is approaching, an authorized liquidator can intervene, withdraw the user's XAU₮ and return a corresponding amount of aUSD₮, not exceeding the minted amount. This mechanism protects the integrity of the system and prevents undercollateralization.

Each vault uses a designated oracle to determine the price of the XAU₮ token and the corresponding Tether asset. For aUSD₮, the Tether asset oracle specifically tracks the U.S. dollar price, creating a 1:1 peg between aUSD₮ and $1.

Vault technology is critical to the operation and security of the Alloy system because it automates the process of minting, redeeming, and clearing aUSD₮ while ensuring transparency and trust in the system.

Collateral Liquidation

Liquidation occurs when the value of the collateral backing the minted amount falls below a predetermined threshold. The liquidation point for each CMP is 75%, defined by the maximum MTV ratio, representing the maximum fraction of the collateral value that can be minted. In this case, the CMP refers to the amount of aUSD₮ minted by a user and backed by a specific amount of XAU₮ held as collateral in the vault.

If a position is close to the liquidation threshold, an authorized liquidator will step in to liquidate the position, taking back the user's XAU₮ and returning aUSD₮ up to the amount originally minted. Liquidators manage positions close to liquidation by taking collateral at a small discount in exchange for returning aUSD₮. They can purchase some or all of the collateral, depending on the circumstances and the agreed-upon discount.

4. How to obtain Alloy (aUSD₮)

Users can obtain aUSD₮ by depositing XAU₮ into the aUSD₮ smart contract, or trade it on exchanges such as Bitfinex. There are fees for minting, returning, and clearing aUSD₮.

Users can obtain aUSD₮ by transferring XAU₮ to the aUSD₮ smart contract, which then mints and issues the corresponding amount of aUSD₮ directly to the user’s address, or trade aUSD₮ on the secondary market through centralized exchanges such as Bitfinex or decentralized exchanges (DEX).

Tether’s Alloy charges three types of fees, measured in basis points (bps). A basis point is a unit of measurement used to describe a percentage or difference in interest rates or yields. One basis point is equal to 1/100 of 1% or 0.01%.

Minting Fee

The minting fee is the fee incurred when a user creates a new aUSD₮ token. Currently, a fee of 25 basis points is charged for each newly minted aUSD₮.

Refund of Fees

The rebate fee is the fee users pay when they redeem aUSD₮ tokens for their underlying collateral. Currently, a 25 basis point fee is charged per aUSD₮ returned.

Liquidation Fee

The liquidation fee is a fee incurred by a user when their collateral position (ratio of XAU₮ to aUSD₮) falls below a certain threshold and triggers a liquidation event. Currently, liquidators are charged a fee of 75 basis points each time XAU₮ is liquidated, which means that for every XAU₮ token a liquidator receives in a liquidation event, they must pay a fee of 0.05% of its value.

It is important to note that liquidation fees are different from liquidation premiums, which are discounts on liquidated XAU₮ used to incentivize liquidators to keep the system solvent. In contrast, liquidation fees are paid by liquidators to the platform or protocol and help cover the operating costs associated with the liquidation process.

5. What are the advantages of aUSD₮?

AUSD₮ offers several advantages, including stability through its peg to the U.S. dollar and backing from gold, and transparency through auditable smart contracts.

AUSD₮ is backed by Tether Gold (XAU₮), providing a unique investment opportunity. The stablecoin is stabilized by the intrinsic value of the U.S. dollar peg and gold, a well-known safe-haven asset. This combination reduces the volatility often associated with cryptocurrencies by providing a reliable store of value.

In addition, aUSD₮ is based on the Ethereum blockchain and uses auditable smart contracts to provide a secure and transparent minting and redemption process. The overcollateralization model and compatibility with the Ethereum ecosystem further facilitate the generation of returns and seamless integration with different decentralized financial (DeFi) platforms.

It runs entirely on-chain, providing a resilient alternative to the traditional banking system, offering investors stability, diversity, and passive income opportunities (such as returns on over-collateralization).

6. Tether’s Fiat-Pegged Token (USD₮) vs. Tether Gold Token (XAU₮) vs. Tether Alloy (aUSD₮)

USDT is a stablecoin pegged to the U.S. dollar; XAU₮, a gold-backed token representing one troy ounce of physical gold, provided by TG Commodities Limited; aUSD₮ is a stablecoin pegged to the U.S. dollar, but backed by Tether Gold (XAU₮).

While Tether (USDT) is designed for everyday transactions and XAU₮ is ideal for investors seeking exposure to gold, aUSD₮ combines the stability of the U.S. dollar with the security of gold, offering potential yield generation through its unique over-collateralization mechanism.

The following table explains the main differences between Tether’s fiat-pegged tokens (such as USDT), Tether Gold tokens (XAU₮), and Alloy by Tether (aUSD₮) on various parameters:

7. How do users withdraw the XAU₮ deposited as collateral?

Users can withdraw deposited XAU₮ by requesting a withdrawal. To avoid rejection, the MTV ratio must remain below 75% (liquidation point).

Users must initiate a withdrawal request to Alloy using the Tether Vault smart contract. If a withdrawal causes the MTV ratio to exceed the 75% liquidation point, the request will be rejected. This is to ensure that the system remains overcollateralized.

If the MTV ratio exceeds 75%, withdrawal requests will not be approved. In this case, users can lower the MTV ratio by returning a portion of the minted aUSD₮ before attempting to withdraw again. In addition, it is important to remember that withdrawing XAU₮ without a corresponding return of aUSD₮ will increase the MTV ratio, thereby increasing the risk of liquidation.

Additionally, to recover all XAU₮ deposits, users must return the entire amount of aUSD₮ they minted. This may require buying back some aUSD₮ on the secondary market to cover the deficit and successfully complete the withdrawal process.

So when do you need to buy back aUSD₮ to withdraw XAU₮? Users pay a minting fee when they mint aUSD₮. Similarly, when they return aUSD₮ to redeem XAU₮ collateral, they are also charged a return fee. These fees are deducted in USD₮.

This is why users must return all of the aUSD₮ they minted before withdrawing all of their XAU₮; however, due to the fees incurred during the minting and return process, the amount of aUSD₮ they own may not be enough to cover the full return, and they will need to purchase additional aUSD₮ on the secondary market.