How does paUSD work?
Users can deposit from a large variety of collateral types (like WBTC) and borrow a safe amount of paUSD at low interest. As of May 2022, paUSD is over-collateralized by over 6 different tokens on 2 different networks.
To retain its value, a stablecoin must have another asset that is put as collateral to back its intrinsic value. That collateral must be redeemable at any time.
paUSD has a loan and repayment process utilizing collateralized debt positions (CDPs) via the Mimo Protocol to secure assets as collateral on-chain.
That means that for every 1$ of paUSD out there, you can be sure that it’s backed with more than 1$ worth of another asset, such as BTC, ETH or USDC.
If paUSD is trading below 1$, people are incentivized to buy paUSD from open markets and pay off loans at a discount. This ensures that paUSD won’t be worth substantially less than 1$ at all times.
If paUSD is trading above 1$, people have an incentive to mint paUSD from the vaults and sell it for collateral (for example). This ensures that paUSD will not always be significantly higher than 1$.
Stablecoins are cryptocurrencies that are supposed to be pegged to fiat currencies like the US dollar. In the cases of USD-pegged stablecoins, their prices are supposed to be $1 at all times.
Each stablecoin project differs in ways they maintain the peg. The two biggest ones, tether (USDT) and Circle's usd coin (USDC), are "collateralized” by fiat reserves, meaning they have cash or cash-equivalent assets in their reserves. So each USDT or USDC traded in the crypto market is backed by what’s actually in the possession of the stablecoin issuers.
Over the past year, a new form of stablecoin emerged to increase capital efficiency: algorithmic stablecoins, such as terraUSD (UST), magic internet money (MIM), and neutrino usd (USDN).
They’re called algorithmic because what backs them is an on-chain algorithm that facilitates a change in supply and demand between them (the stablecoin) and another cryptocurrency that props them up.
Unlike these projects, the paUSD collateral is not the governance token (MIMO), but assets such as Bitcoin, Ethereum, USDC, MATIC, etc. which ensures a better stability than when it is correlated to a governance token with a lower market cap.
This guide is not financial advice.
Keep in mind that a strategy that works well at a given time may perform poorly (or make you lose money) at another time. Please stay informed, monitor the markets, keep an eye on your investments, and as always, do your own research.