Polkadot moves forward with pUSD, a DOT-backed stablecoin aimed at boosting DeFi liquidity, reducing reliance on external stablecoins.
Polkadot is preparing to launch its first native stablecoin, pUSD, designed to be fully backed by DOT tokens. In May, a formal proposal highlighted its role in boosting DeFi growth and reducing reliance on USDT and USDC. Voters now prefer a referendum on the measure, and it is close to passing.
DOT-Collateralized Stablecoin Gains Traction in OpenGov
The venture states pUSD is an over-collateralized debt token designed to let users borrow against their DOT holdings without sacrificing them. This mechanism promises to bring more stability to traders and liquidity providers and promote developer activity. Polkadot’s Asset Hub system chain is set to issue pUSD as the stable asset for the network.
The stablecoin has been designed with the Honzon protocol created by Acala. That would have used DOT as the only collateral and not used the mixed collateral models that exposed other projects to risk. Optionally also included is a pUSD Savings module, which allows the holders to lock tokens and gain interest based on stability fees.
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The stablecoin may be included in Polkadot’s Treasury for payments and reduce the need for maintaining separate reserves in external stablecoins. Over time, the Treasury could use pUSD as an incentive for staking that eliminates DOT inflation and replaces it with stable payouts.
Polkadot’s proposal is one part of an industry trend towards chain-native stablecoins. Several competing blockchains have created similar assets to build internal economies and mitigate third-party risk, such as Cosmos and Near. Others point to Circle’s USDC and Tether’s USDT as becoming potential risk factors because they are subject to external governance and regulatory interventions.
pUSD Stablecoin Sparks Governance Debate in Polkadot
By establishing pUSD, Polkadot is making the conversion between OpenGov DOT-stablecoin and pUSD be much more convenient and at the same time promoting self-sufficiency. However, the proposal has caused political controversy. Observers warn against a system-level stablecoin by Hydration. However, they also note issuers like Circle could complicate governance across the ecosystem.
Despite possible friction, proponents believe that pUSD can unleash the liquidity that has inhibited Polkadot’s DeFi space. Blockchain development has slowed because applications struggle to bring native liquidity into their systems. This problem also discourages developers from building. However, they believe a stablecoin with strong support from the DOT community can change this. Such a currency would act as a foundation for many decentralized protocols. Moreover, it could restore developer confidence. In addition, it would create a stable base for future growth.
If approved, pUSD would become an integral part of the Asset Hub of Polkadot. This could attract traders who need a stable medium of exchange. Moreover, it could support developers building DeFi apps and holders borrowing against DOT without liquidation.
The Proposals are also directly related to Polkadot’s governance system. OpenGov tokenholders would guide the rollout, and the decision would reflect decentralized consensus. This democratic process could increase legitimacy and showcase Polkadot’s community-driven model.
In the broader context, the decision to adopt DOT-backed stablecoin indicates Polkadot’s dedication to fostering economic resilience within its ecosystem. By de-pegging, the network takes a step towards reducing its reliance on outside stablecoins and enabling greater autonomy and liquidity.
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