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June 1, 2022

The Velo Digital Credit Difference

With a lot of focus as of late on stablecoins and their intrinsic stability, we thought we’d dive a little deeper into how Velo Digital Credits are different from your average stablecoin and how the Velo Protocol incorporates additional guardrails to maintain a 1-to-1 fiat peg.

With a lot of focus as of late on stablecoins and their intrinsic stability, we thought we’d dive a little deeper into how Velo Digital Credits are different from your average stablecoin and how the Velo Protocol incorporates additional guardrails to maintain a 1-to-1 fiat peg.

Our Mission

Velo is committed to providing a stable and trustworthy financial ecosystem for our investors and our partners. Our network of cross-border financial infrastructure, international remittance partners, and institutional and retail trading platforms creates a robust system of value transfer for our partners and customers.

Our Token

The VELO token lies at the heart of the Velo Protocol and is the fundamental building block of the Velo ecosystem. The Velo Protocol allows licensed financial institutions to create and exchange Velo digital assets pegged 1:1 to any local currency, and backed by Velo tokens, which act as a secondary guarantee to ensure settlement of all fiat deposits in the network. Businesses leveraging Velo Digital Credits (i.e. Velo Stablecoins) can move value freely and efficiently, cross-chain and cross-border, in and out of any currency. The VELO token itself is a price fluctuating asset that derives its value through both its utility and its supply/demand on Centralized Exchanges (CEX) and Decentralized Exchanges (DEX). It is similar in nature to other tokens like BTC, ETH, and etc.

The VELO token is issued on the Stellar blockchain network, an open-source distributed ledger used specifically for payments. The VELO token is used by Trusted Partners as collateral for receiving Velo Stablecoins and represents a value link between fiat deposits and stablecoins.

Our Digital Credits

Velo issues various stablecoins, what we know as Velo Digital Credits, that can be used as on/off ramps for our issuing partners on the cross border payment network. These stablecoins are price stable assets pegged to a reference fiat currency (1 USDV = 1 USD, 1 EURV = 1 EUR).

Velo stablecoins are collateralized by a basket of assets that includes cash/cash equivalents and Velo Tokens. The process of both creating and maintaining the value of these assets can be described as follows:

  • First, Velo Stablecoins are created by an Issuer (i.e. a Trusted Partner) by locking VELO Tokens into a smart contract
  • Second, Velo Stablecoins are then used by the Issuer by exchanging them for cash/cash equivalents. 

The cash/cash equivalents received by the issuer is used as the primary collateral. VELO Tokens are used as the secondary collateral. Velo Stablecoins are thus over collateralized (eg. $1 worth of Velo Stablecoin is backed by more than $1 worth of these basket of assets)

Our Difference

And now the big question that’s likely on your mind, given the recent de-pegging of UST, how is Velo different from Terra/Luna and how are Velo tokens and other Velo stablecoins different from algorithmic stablecoins?

If you look at the market today, there are four categories of stablecoins:

  • Fiat Backed: these stablecoins (e.g. USDC, USDT, USDP, etc.) are pegged to a fiat currency (USD) and backed by cash reserves. They are audited and some are also regulated (e.g. Paxos by State of New York)
  • Crypto Backed: these stablecoins are backed crypto assets as collateral, and maintain a consistent value through rebalancing adjustments based on supply and demand (DAI, Velo’s Digital Credits)
  • Commodity Backed: these stablecoins are pegged to the price of gold/silver. They have reserves in commodities (PAX Gold, DGX)
  • Algorithmic: these stablecoins do not have any associated collateral; the algorithm sets the rules for balancing supply and demand (e.g. UST)

Velo’s stablecoins are backed by both fiat and crypto reserves and are fundamentally different from algorithmic stablecoins (e.g. UST), which are uncollateralized. Velo’s stablecoins are similar to DAI or RAI stablecoins (i.e. over-collateralized and supported by a basket of assets like Velo tokens and USDC or other cash equivalents). 

Additionally, Velo stablecoins like USDV, EURV, GBPV are collateralized with digital assets and seek to maintain full collateralization through our Digital Reserve System, thus ensuring the proper reserves are in order. UST, by contrast, had no collateral and was only supported algorithmically. Because of this, one could get $1 worth of UST for $0.20 of locked Bitcoin. Velo stablecoins are over-collateralized and, thus, maintain their 1:1 peg.

Our Guardrails

Velo stablecoins are collateralized by cash (fiat) or cash equivalents. This is important because at no time are Velo stablecoins in jeopardy of being under-collateralized or untethered from their fiat peg or cash reserve. Velo stablecoins also benefit from a robust ecosystem of usage and partner utility.  Our partners (Anchors on our Cross-Border Payment Network) who issued Velo Stablecoins can sell them to other parties for cash or cash equivalents (e.g. Bitazza sells vUSD to Tempo for cash/cash equivalent (USDC or USD). The Issuer who sold Velo Stablecoins must keep the fiat / cash equivalent that they receive as the primary collateral for the stablecoin

Additionally, the VELO tokens themselves act as a second layer of guarantee. To create a Velo stablecoin, the issuer locks up VELO Tokens as collateral and to redeem Velo Stablecoins for VELO Tokens (e.g. collateral), the issuer needs to lock the stablecoins they received, which unlocks VELO tokens.

So that’s an overview of how Velo Digital Credits set themselves apart from the rest of the market and the additional safeguards in place to ensure they retain stability. Velo is and will always be committed to providing a stable and trustworthy financial ecosystem for our investors and our partners.