The TEA Token: A Special Type of Stablecoin
Stablecoins, as are commonly known in the crypto world, refer to assets that are correlated 1:1 with the value of the US dollar. There are three main types of stablecoins:
1. Collateralized stablecoins
Examples:
- USDT (Tether)
- USDC (Coinbase & Circle)
- GUSD (Gemini US Dollar)
Collateralized stablecoins are backed by currency such as the US dollar, precious metals (gold and silver), and commodities like crude oil. The collateral must be held by a custodian and regularly audited to assure redemptions will always be available should a bank run occur.
This class of stablecoins was created to provide a stable asset in the volatile crypto market. “Collateralized” here means backed at least 100% by underlying assets.
This is a recent breakdown of the collateral that’s backing USDT:
USDC is an ERC20 asset that’s issued on the Ethereum blockchain. Each USDC on the Ethereum network is redeemable for one dollar as it’s backed by one dollar (or dollar equivalent asset) held in audited accounts at U.S. financial institutions. These institutions undergo monthly attestations on their reserves backing USDC.
An asset like USDC gives users flexibility in exchanges where they can tokenize dollars to USDC and convert them back at any time. A stablecoin also smooths out inherently volatile crypto assets and makes issuances like donations and paying employees much more practical as the token doesn’t change in value over time. Much of USDC’s popularity comes from it being issued as an ERC20 token on the Ethereum blockchain, where it’s an ideal counterpart to many DeFi dApps.
As a crypto enthusiast, you might not like that these asset audits all happen off-chain. Is it good or bad that Blackrock is the entity behind $50+ billion of USDC’s reserves? Coming from the blockchain world where everything’s on-chain, the USDC and USDT collateral mechanisms can purport their audited status yet at the same time be a bit of an enigma. We’ll never know how well Blackrock is managing their assets, and we’re instead asked to put trust in a financial system designed to be opaque to outside observers.
2. Over-collateralized stablecoins
This second class of stablecoins are collateralized with crypto assets at a ratio above 100%.
Examples include:
- DAI (Maker DAO)
- MIM (Magic Internet Money)
- sUSD (Synthetix)
DAI, the largest decentralized stablecoin, is an over-collateralized asset, meaning that you first must provide collateral and then mint DAI against it. The collateral ratio is generally above 150%. Many who mint DAI choose to use USDC as the base collateral as there are only minuscule fluctuations in the underlying minting asset in that case. Minting DAI versus an asset like Ethereum will present a liquidation risk if ETH ends up losing half its value.
A great benefit of an asset like DAI is that everything’s on-chain. This is in keeping with the ethos of blockchain in not needing to trust any 3rd-party auditing entity implicitly. The drawback with DAI is that even-though it’s over-collateralized, there’s a liquidation risk for those minting DAI from volatile assets. But DAI holders not using the minting function don’t have this concern.
3. Algorithmic stablecoins
Examples:
- UST (Luna)
An algorithmic stablecoin uses complex algorithms (as its name suggests) to maintain its peg to the dollar.
Let’s take a look at how this would work with what was until recently the largest algorithmic stablecoin, UST. When UST goes below a dollar, LUNA is minted. That LUNA is used to buy back UST, and that UST would be burnt. This introduces both buy pressure on UST and a supply reduction from the burning, both of which support the price of UST. This is what is meant by an algorithm being used to maintain the peg. There’s otherwise no hard collateral backing UST.
The main drawback of algorithmic stablecoins is that they can fail, as we’ve seen with LUNA’s UST.
TEA Project’s TEA Token: A Stablecoin Not Pegged to the Dollar
In the TEA Project, the TEA token is used for many purposes in the TEA ecosystem:
- Users can stake tea to mining nodes to earn rewards.
- Users can purchase TApp tokens to invest in promising TApps.
- TEA token is returned to the DAO treasury when a prospective miner buys a CML for their mining node.
- Consumers spend TEA tokens to use TApps.
- TEA is used for gas in the TEA ecosystem.
There’s more information about the various functions of the TEA token and the thought process that went into its design in the following article:
The TEA token can also be thought of as a stablecoin in the sense that from the user’s perspective, the cost of running a computing task is stable relative to its cost in TEA tokens. Stated another way, TEA is pegged to the consumption of computing resources (CPU instructions, RAM size, network traffic, storage, etc.)
Users new to the TEA ecosystem can think of it this way: for a specific computing task, the TEA cost will be stable. That is, whenever you wish to run the same computing task, it will cost the same amount of TEA.
How Does TEA’s Peg to Computational Resources Affect Its Price?
Although TEA is pegged to computing cost, its value will fluctuate relative to the dollar. But since developers and consumers can count on a computing task costing the same amount of TEA no matter its price, we see a few arbitrage opportunities playing out with regard to the price of TEA.
- If the price of TEA/USD goes down, then both consumers and developers (who need to pay miners) could purchase TEA in the open market to secure “cheap” TEA for future computing expenses.
- There is the possibility for actual arbitrage between different platforms executing the same computing task.
As an example of the 2nd example of arbitrage between different platforms, imagine that there’s an AI inference app running in the cloud (on AWS servers) that’s also been released as a TApp on the TEA Project. As the price of TEA goes lower relative to USD, the company behind the app will be incentivized to move more of their operations to the TEA Project platform to save money. That would require them to purchase TEA to run their TApp, which would help support the price of TEA.
Be sure to join us in our Telegram group to discuss these and other topics related to our project.
