Canza Finance: Stable Coins 1.0

Canza Finance is a Fintech product offering of SaukiBit Inc. Canza is a Peer-to-Peer Neobank strengthened by Decentralized Finance (DeFi) and facilitated through a robust network of experienced local money market players. Sub-Saharan Africa is historically underserved concerning financial services. Canza aims to provide traditional financial services to millions of Sub-Saharan Africans without disrupting existing customer behaviors.

One of the key criticisms against cryptocurrencies is the volatility in their prices. However, stable coins are able to counter this notion, since they are pegged to real-world assets ensuring that the price of these cryptocurrencies remain stable compared to their underlying reference.

Stable coins are traditionally pegged to an outside asset class, such as gold or fiat currency. Some examples of stable coins include Tether, USDC, BUSD, DAI, and cUSD.

Centralized / Asset-backed stable coins:

Decentralization is at the core of blockchain technology, as it is the necessity that led to its development. The idea of (private) governing entities is frowned upon by crypto enthusiasts around the globe; as blockchain technology is championed as a “Revolution” to the traditional banking system.

Most stable coins, on the other hand, are centralized, (some of which include: Tether, BUSD), and are issued by corporate entities. This system mirrors the legacy banking system similar to the gold standard. This system required an equal store of value in the reserves relative to the issued currency.

This raises two key issues. The first one is with regards to the claims made by the centralized corporate entities issuing these stable coins are backed 100% by reserves is not always the case. To ensure that they are fully backed external this would require an external audit which goals against the principles of decentralization. Secondly, requiring real-world assets creates an additional risk with regards to the availability of accessing the underlying assets required to establish stable coins and results in capital inefficiencies.

Additionally, if a fractional reserve system is employed, similar to how central banks operate, users of stable coins will require users to trust the issuers of the stable coins, once again challenging a principal tenant of cryptocurrencies.

Decentralized / Crypto-backed and Algorithmic stable coins:

Backed by crypto assets, these decentralized stablecoins rely on trustless issuance to maintain their 1:1 peg against assets via over-collateralization, incentives, and other methods. This category of stable coins include DAI, cUSD, MIM, and EOSDT.

Crypto-collateralized stablecoins enable the ability to use crypto assets as collateral, to mint stable coins against it. To mitigate the risk tied to the volatility of the collaterals, most stable coins are often over-collateralized and can also be backed by multiple types of collateral at once ensuring that the peg is maintained in a decentralized and permissionless manner.

Collateralized stable coins also solve the capital efficiency issue as it allows the minter of the stable coin to still benefit from benefits associated with increases in the price of the underlying asset. Additionally, platforms such as Abracadabra allow for the deposit of interest bearing tokens, allowing for the increase user to mint MIMs with an underlying open position that will gain in value, even if backed by other stable currencies.

In subsequent publications, we will discuss the vision of fully algorithmic stable coins.
Stay glued ✌🏽.

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