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Lesson 31: What is First Digital USD (FDUSD)?
Lesson Intro:
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Each lesson includes critical thinking questions and a glossary. We encourage participants to use these lessons, and to memorialize their learning path by building a profile on Prison Professors Talent. More information on how to build a personal profile at the end of this workbook.
31. What is First Digital USD (FDUSD)?
TL;DR
First Digital (FDUSD) is a reserve-backed stablecoin launched in June 2023 by First Digital Limited. It operates on Ethereum and BNB Chain, with plans to expand to other blockchains. FDUSD is fully backed by cash or equivalents, verified through independent audits.
Key Takeaways
- Introduced in June 2023, First Digital (FDUSD) is a reserve-backed stablecoin issued by a subsidiary of Hong Kong-headquartered financial firm, First Digital Limited.
- FDUSD launched on the Ethereum and BNB Chain networks, with plans to be issued on other blockchains in the future.
- FDUSD provides an “attestation of reserve” report audited by independent auditors to demonstrate that FDUSD is fully supported by an equivalent value of cash or cash equivalents.
What Is First Digital USD (FDUSD)?
First Digital (FDUSD) is a stablecoin issued by FD121 Limited, a subsidiary of Hong Kong-headquartered financial firm, First Digital Limited. Introduced in June 2023, FDUSD is intended to be backed by one U.S. dollar or asset of equivalent value held in reserves with its appointed custodian, First Digital Trust Limited.
As a trust company registered under Hong Kong law, First Digital Trust Limited is mandated to safekeep all FDUSD reserves in segregated accounts. It means there is no commingling of FDUSD reserves with other assets at the firm. Reserves are also mandated to be held in cash or highly liquid assets, which the firm claims to help ensure the 1:1 backing of the FDUSD.
The issuer of FDUSD publishes an “attestation of reserve” report that’s audited by independent auditors to show that the supply of FDUSD in circulation is fully supported by an equivalent value of cash or cash equivalents held in custody.
FDUSD was issued on the Ethereum and BNB Chain networks at launch, but has plans to be issued on other blockchains in the future. With many stablecoins already in the market, FDUSD seeks to offer additional instruments for diversification to users interested in using stablecoins.
Why Is FDUSD Useful?
Cryptocurrencies offer many advantages over fiat currencies as a form of payment and in other use cases, providing faster transactions and lower fees, in addition to being more secure and privacy-preserving.
Stablecoins like FDUSD are digital native instruments that are designed to maintain a stable value, helping to bridge the traditional financial ecosystem and the cryptocurrency market. Stablecoins like FDUSD allow fiat currencies to be represented in the crypto world while being able to move more freely and efficiently.
What Are the Use Cases of FDUSD?
FDUSD offers various uses cases, including the following:
- Remittances
- FDUSD can be used for fast and cost-efficient cross-border transactions, providing an economical option for remittance services. Compared to traditional bank wires or transfers, stablecoins like FDUSD have much lower fees and transactions are completed more quickly.
- Payment solutions
- Similarly, FDUSD can be used by businesses and individuals to process payments with lower fees and faster processing. This is particularly valuable for international transactions, which traditional payment methods often charge additional currency conversion and cross-border transfer fees.
- Hedging against price volatility
- Considering the volatilities in the crypto markets, FDUSD can be used as a hedgeand an anchor of stability during periods of volatile price movements. Investors can convert other crypto into stablecoins like FDUSD to lock in gains or protect their investments from extreme market swings.
- Usages in DeFi
- Similar to other stablecoins, FDUSD can be used throughout various DeFi applications to do yield farming, lending, borrowing, and staking.
What Are the Risks of FDUSD?
FDUSD has some risk factors that users need to be aware of. They include the following:
- Risks of depegging
- FDUSD’s pegging mechanism depends on its reserves’ being able to support the redemption of FDUSD at par at any given time for all redemption demand. Therefore, the safety and liquidity of the reserve assets is key to FDUSD’s stability. FDUSD’s reserves are held in custody by a third-party, and can vary from highly liquid to illiquid assets. There are risks from the potential failure of the issuer to fulfill the claimed stablecoin features, including its nominal value and timely redemption at par.
- Operational risks
- FDUSD is subject to operational risks, including fraud and cyber risks. FDUSD relies on third-party services such as exchanges and custody services, which are exposed to various operational risks. Moreover, there are no effective remedies for the loss or theft of crypto assets, which could expose users to additional risks.
- Regulatory risks
- The regulatory environment for stablecoins is currently full of uncertainties. The rules in different jurisdictions vary greatly and evolve rapidly, which could impact certain FDUSD operations.
- Counterparty risks
- The operation of FDUSD involves third-party financial intermediaries, which expose users to counterparty risks. These could lead to delays in redemptions and increased costs because stablecoin issuers depend on exchanges, market makers, banks and other money transmitters to facilitate redemption.
Closing Thoughts
The stablecoin market is projected to grow to trillions of dollars in the next five years, up from just over $100 billion as of mid-2023, according to market researchers. FDUSD is among the many new entrants in the flourishing stablecoin space.
As the adoption of cryptocurrencies continues, both traditional financial institutions and crypto-native entities are increasingly looking at issuing their own stablecoins, tailored to their niche markets and target audiences. This suggests that users will have a broader range of choices when deciding on the best stablecoins for their needs.
However, while stablecoins come with numerous benefits, they aren’t without risks. Users should exercise caution and conduct detailed research before engaging with any stablecoin. Always make it a point to review the stablecoin’s whitepaper, reserve reports, audit findings, and any related legal disclaimers, which are usually available on the stablecoin’s official website.
Further Reading
- What Is a Stablecoin?
- A Beginner’s Guide to Cryptocurrency Trading Strategies
- What Is MakerDAO (DAI)?
Critical Thinking Questions
- Evaluate the potential benefits and drawbacks of using a stablecoin like FDUSD for international remittances. What factors should be considered to determine if this is a viable option for cross-border transactions?
- Analyze the role of independent audits in maintaining the credibility and stability of a stablecoin like FDUSD. How do these audits impact user trust and the overall stability of the financial system?
- Discuss the various risks associated with FDUSD, including depegging, operational risks, regulatory risks, and counterparty risks. How might these risks affect the stability and reliability of FDUSD as a financial instrument?
- Consider the implications of the increasing adoption of cryptocurrencies and stablecoins by traditional financial institutions. What potential changes might occur in the financial ecosystem as a result, and how could these changes impact users?
- Reflect on the importance of conducting detailed research before engaging with any stablecoin. What specific information should users look for in whitepapers, reserve reports, and audit findings to make informed decisions?
Advocacy Initiative:
We encourage participants to begin memorializing the ways they are using time in prison to prepare for success upon release. I encourage participants to create a personal profile by:
- Writing a simple biography
- Writing a daily journal to show all that you’re learning
- Writing book reports that memorialize the books you read
- Writing a release plan to show the ways you’re preparing for success upon release
These strategies helped me immensely once I got out. By using my time wisely inside, I was able to raise capital, build businesses, and succeed in ways that few people would think are possible for someone who served multiple decades in prison. Anyone can do the same—if they prepare first.
If you’d like to follow in the same footsteps, I encourage you to begin building your personal profile. Get started by sending an email message to our team at:
Prison Professors Talent
[email protected]
32565 Golden Lantern, B-1026
Dana Point, CA 92629
Our interns will accept your email invite. You may then send the interns a message such as:
Dear Interns,
My name is xxx, and I am in prison. I would like to begin showing the strategies I am using to prepare for success upon release. Please send me a Release Plan Workbook, and any other books that will help me prepare for the job market. After receiving those workbooks, I will begin building my profile to show others how I am using my time inside to prepare for success outside.
Sincerely,
[Your Name]
Glossary
- Algorithm (noun): A step-by-step procedure or formula for solving a problem or performing a task.
- Bitcoin (noun): A decentralized digital currency that uses cryptography for secure transactions on a blockchain.
- Block (noun): A unit of data containing transaction information, which is added to a blockchain.
- Blockchain (noun): A decentralized digital ledger that securely records transaction data across many specialized computers on the network.
- Collision (noun): The occurrence when two different inputs produce the same hash output.
- Cryptographic Hash Function (noun): A hash function that uses cryptographic techniques to ensure data integrity and security.
- Data Integrity (noun): The accuracy and consistency of data over its lifecycle.
- Deterministic (adjective): Producing the same output from the same input every time.
- Hash (noun): The fixed-size output generated from input data using a hash function.
- Hash Function (noun): A mathematical formula that converts input data into a fixed-size output (hash).
- Hash Rate (noun): The measure of computational power used in cryptocurrency mining.
- Immutability (noun): The characteristic of being unchangeable once recorded.
- Merkle Tree (noun): A data structure used in blockchain to efficiently verify the integrity of data.
- Mining (noun): The process of performing complex calculations to validate transactions and add them to a blockchain.
- One-way Function (noun): A function that is easy to compute in one direction but difficult to reverse.
- Output Size (noun): The fixed size of the hash produced by a specific hash function.
- Preimage (noun): The original input data that is hashed to produce a specific hash.
- Resistance (noun): The difficulty of performing a certain action, such as reversing a hash function.
- SHA-256 (noun): A cryptographic hash function that produces a 256-bit hash, used in Bitcoin.
- Zero (noun): The leading character in a hash that meets the difficulty criteria in Bitcoin mining.
