Cardano's Decentralized Stablecoin USDM

Cardano is one of the leading blockchain platforms in the world and rightly so. It has continued to push the boundaries of decentralised finance by coming up with solutions to the various problems investors face in the crypto space.

As a response to the high volatility in the crypto market, Cardano in partnership with Mehen has come up with its own stablecoin called USDM in a bid to give investors the much needed stability needed to safeguard their assets. USDM brings a new level of trust and reliability by making good use of Cardano's decentralised Infrastructure.

What is USDM?

To understand what USDM is all about, you have to know what stablecoins are and how they work. Stablecoins are cryptocurrencies which are meant to have a stable value by being pegged to fiat currencies such as the US dollar or commodities like gold. This makes it ideal to use as a store of value compared to other cryptocurrencies such as Ethereum and Bitcoin which go through frequent price fluctuations. There are different types of stablecoins, but our focus will be on decentralised stablecoins, the category which USDM falls under.

USDM is a decentralized stablecoin built on the Cardano blockchain. It is backed by the US dollar on a 1:1 ratio; this helps ensure reliability and stability. The stablecoin is backed by the USDM reserve which comprises US money market funds managed by Fidelity and Western Asset Management.

How Does USDM Work?

USDM runs on a decentralised model, meaning that a single entity doesn't control its issuance or management. Instead, it is managed through smart contracts and algorithms which control the collateral backing it.

USDM is backed by a pool of assets that users deposit into smart contracts. These assets can include Cardano's native token ADA or other crypto assets. The collateralisation ratio is carefully managed to ensure that there is enough in reserves to maintain the stablecoin's peg to the US dollar.

The minting process for USDM is relatively simple. What you have to do is connect your Cardano Wallet to Mehen dApp, verify your identity and link a bank account. However, while USDM is available to everyone all over the world, only people who have completed their KYC in licensed locations can mint and redeem USDM for USD.

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How Do Fiat-backed Stablecoins Work?

A fiat-backed stablecoin is backed by cash reserves of the currency it is tied to. This currency has to be a fiat currency, that is, government issued money. This type of stablecoin is backed by a legal tender which determines the value of the coin. For instance, a stablecoin pegged to the US dollar would have a price which is proportional to that of the US dollar.

In order to buy a fiat-backed stablecoin with real money or convert already owned stablecoins into real cash, you need to complete KYC requirements and exchange through an interface created by the issuer of the token. In regards to USDM, the interface would be Moneta dApp.

Conclusion

Stablecoins are becoming an important part of the ecosystem and it is only natural that as one of the leading blockchains in the crypto industry, Cardano adopts a stablecoin of its own while leveraging the power of decentralization to give investors the stability which is needed while managing assets.