Fully backed reserves is a way institution or stablecoins assures their customers they have reserved enough money in case of market instability. Traditional institutions and banks facilitate the deposit of individual funds and hold them for you, this is called saving. But most of the banks do not actually hold the money, they rather lend out the money to maximize their returns. This is to safeguard their funds in the time of financial crisis. But this poses risks and failure at times, besides, crypto shows more failure. so, what is fully backed reserve??
A fully backed reserve is typically the strategy that financial institution or stablecoins assure the customer that they have stored enough money in reserve which are equal to or greater than the actual liability. In crypto terminology, fully back reserve is a situation where crypto is tied to a fiat currency or commodity which is equal to or greater than the crypto.
In 2021 several institutions misused customers’ money, since then, crypto investors have been cautious to either lend or deposit their assets in such institutions. A good example is Alemada’s research, they used FTX customer funds to take a trade position. Worse than this, several institutions lend their customers money to the market. Therefore, the only safe way to assure customer funds is to fully back their reserves.
Understanding Fully Backed Reserve
Stablecoin is a financial asset or product that claims to be fully backed. This means that the money stored in reserves is equal to or more than the actual product that is fully backed. Therefore, the strategy ensures that the financial institutions do not luck money to pay customers’ withdrawals at any time no matter how cruel or better the market is. When an asset is fully backed, it ensures that stability is maintained. Although cryptocurrencies are known for their volatility, stablecoins are relatively low in volatility thus reducing the risk of market shifts.
Fully backed reserves ensure that the customers’ funds that are in exchanges and financial institutions are safeguarded, and the risk associated with certain assets is mitigated. It ensures stability to those assets. If the stability of an asset is maintained in the market, during the volatility period in the market the asset does not lose its value since fully backed reserve provides a buffer against market volatility. Additionally, a fully backed reserve provides stability to stablecoins by ensuring that the assets are backed by an asset or commodity that is greater than the actual value of the stablecoin.
Therefore, fully backed institutions assure customers of the safety of their assets no matter how the market is. If the market is not stable, customers can still withdraw their assets with no delay. Institutions should ensure that they will not be bankrupt even with huge withdrawals of their deposit simultaneously.
Samples Of Fully Backed Reserves
Most of the fully backed assets are stablecoins, stablecoins are cryptocurrencies that are tied to a commodity, another currency or financial instrument, they are created to provide stability and alternatives during times of high volatility to well-known cryptocurrencies, for instance, Bitcoin. There are various ways that cryptocurrencies are fully backed, either commodity-backed or crypto-backed.
Commodity-Backed Stablecoin
Stablecoins are among the fully backed cryptocurrencies, commodity-backed stablecoins are backed by commodities such as gold, oil, real estate or other commodity. This is an opportunity for investors who are willing to invest in cryptocurrencies that are fully backed in case of high volatility. These stablecoins are important in the Blockchain representation of commodities that are fully backed by reserves that are held by centralized entities.
There are various stablecoins that are pegged to commodities; Tether Gold is one of the stablecoin cryptocurrencies that is tied to commodities. Tether Gold (XAUt) is the largest token of gold, at the time of writing XAUt was trading at $1980.65 USD with a 24-hour trading volume of $5349220.70 USD.
Crypto-Backed Stablecoins
A cryptocurrency-backed stablecoin is a fully backed reserve for another crypto. Cryptocurrencies that are fully backed by other cryptocurrencies are used to ensure stability; they lock up a certain amount of cryptocurrency in order to mint stablecoins. Crypto backed stablecoins are collateralized to ensure that the security of stablecoin is maintained even though the market of cryptocurrency even during high volatility in the market. Over-collateralization is a strategy that is used to maintain the value of the stablecoin, normally, the crypto backing the stablecoin is higher in value than the stablecoin in circulation.
An example of a crypto backed stablecoin is DAI. DAI is created on the ETH Blockchain which is pegged to U.S. dollars. It is pegged by Ethereum, Dai (DAI) is a decentralized stablecoin running on Ethereum (ETH) that attempts to maintain a value of $1.00 USD. at the time of writing its trading volume was $250,528,054 USD.
Conclusion
A fully backed reserves is therefore a strategy that ensures stability in the market by assuring that individual assets are well-kept by exchanges. An example of fully backed reserves is stablecoins, they ensure that they are backed by either commodities or other cryptocurrencies that are worth more than the value of a fully backed stablecoin or the exact value of the stablecoin.
