Polkadot weighs native DOT-backed algorithmic stablecoin

A proposal for Polkadot to create its own native algorithmic stablecoin, exclusively backed by DOT token, is gaining strong early support.

Co-founder and chief technology officer of Polkadot chain’s Acala, Bryan Chen, introduced a proposal on Sunday to develop a native stablecoin for the Polkadot network. The stablecoin would be algorithmic, exclusively backed by Polkadot (DOT) tokens, and would use the pUSD ticker.

The proposed stablecoin would leverage the decentralized stablecoin and collateralized debt position protocol Honzon on the Acala network. The system is meant to reduce or replace dependence on Tether’s USDt (USDT) and Circle’s USDC (USDC) stablecoins.

At the time of writing, over three-quarters of the votes have been cast in favor of the proposal. Still, there are over 24 days to go before the ballot closes, and so far more than $5.6 million worth of DOT has been used to cast votes — over 1.4 million DOT at a price of around $3.90.

Related: Stablecoins: Depegging, fraudsters and decentralization

The stablecoin’s design

The proposed pUSD algorithmic stablecoin would be an overcollateralized debt token backed by DOT. It would also include an optional savings module, allowing holders to lock their stablecoins and earn interest from stability fees.

The motivation behind the plan, according to Chen, is to strengthen Polkadot’s ecosystem with a native stablecoin. “Polkadot Hub should have a native DOT-backed stablecoin because people need it and otherwise we will haemorrhage benefits, liquidity and/or security,” the proposal reads.

A decentralized algorithmic stablecoin is designed to track the price of a fiat currency without leveraging centralized collateral held by third parties. Instead, the collateral consists of digital assets held onchain and managed by smart contracts, while the peg is maintained through economic incentives programmed into the contracts.

Related: Sonic Labs ditch algorithmic USD stablecoin for UAE dirham alternative

Algorithmic stablecoins remain controversial

Algorithmic stablecoins have seen their popularity decline following the high-profile collapse of Terra’s native stablecoin, TerraUSD (UST), which brought the entire ecosystem down with it. Still, this category of assets continues to attract considerable attention, partially due to their superior decentralization.

Such decentralization implies that this approach allows for a more permissionless (less controllable) design. Ki Young Ju, CEO of crypto analytics firm CryptoQuant, said in early May that algorithmic stablecoins could facilitate the creation of “dark stablecoins” that do not comply with regulations or sanction enforcement.