Abra is unlike any other crypto wallet or exchange currently in existence. At its core, Abra is a decentralized investing platform that uses cryptocurrencies as collateral to create synthetic assets.
Abra’s synthetic asset model is the first of its kind and leverages bitcoin and litecoin blockchain-enabled smart contracts to reduce friction for anyone interested in buying, selling, and holding other assets such as alternative cryptocurrencies.
Right now the technology provides a seamless investing experience for Abra users interested in gaining exposure to crypto assets and fiat currencies, with more types of assets on the way.
The implications for this technology are enormous and could eventually lead to creating crypto-backed representations of all kinds of value, including traditional securities. As cryptocurrencies continue to grow in terms of both market capitalization and use cases, a crypto-collateralized synthetic currency model could also provide the underpinnings of a global crypto bank.
By giving investors exposure to cryptocurrencies and fiat currencies through a single mobile app-based wallet, the Abra app is safe and secure, while the underlying platform is scalable. The only thing needed to participate, from anywhere in the world, is a smartphone.
How Abra’s synthetic assets work
The easiest way to understand how Abra’s synthetic assets work is to walk through the steps of a transaction as it would unfold on the Abra app. In this example, an Abra user wants to store US dollars in their Abra app. Here is how they would use bitcoin (or litecoin) to store US dollars:
- The deposit: When an Abra user deposits funds into his or her wallet, the funds are immediately converted to either bitcoin or litecoin and then live on one of those respective blockchains. This is the first thing that happens, and it’s really important to understand. Abra is unlike many other cryptocurrency exchanges in that our core technology is based on decentralized principles. Each Abra wallet is non-custodial, which means the assets deposited by the investor are not controlled by Abra or any other third-party.
- The peg: For the sake of easy math, let’s say that an Abra user deposits $200, which at the time of deposit also happens to be the value of one bitcoin (so, for the purposes of this exercise let’s pretend that 1 BTC = 200 USD at deposit time). As soon as the fiat dollars are deposited, they are converted to one bitcoin. Those assets are stored in a multisignature contract (both Abra and the user are part of the contract) but they are still represented as USD in the Abra app on the user’s screen. The multisignature contract effectively outlines the terms of the peg for both the user and for Abra, essentially creating a crypto-collateralized stablecoin.
- The hedge: So far so good. The deposit now exists on the blockchain and the initial $200 is now pegged to one BTC. But what if the Abra user keeps their balance in USD on the app, and then the value of BTC drops? Well, in order for Abra to cover the difference, there needs to be some kind of hedge in place. Everytime an Abra user opens a smart contract, Abra immediately hedges away its risk, so that the company has the ability to honor all trades at all times. Effectively, when an Abra user funds his or her wallet, they are taking a short position on bitcoin/litecoin and a long position on the hedged asset, and Abra is taking a long position on bitcoin/litecoin and a short position on the hedged asset. To eliminate the exposure of the price moving against Abra we will borrow an equivalent amount of deposited assets from a crypto broker. Still using our hypothetical example, Abra will borrow one BTC, sell it to a different broker in exchange for USD, and keep the $200 in an exchange account. Now let’s say that the price of BTC drops to $160 but the user is still holding USD in his or her wallet. At this point, the user would expect to be able to withdraw $200 USD, regardless of what the price of bitcoin/litecoin is doing. In order to make that happen, Abra would add .25 BTC ($160 x .25 = $40) to the user’s smart contract. The user’s balance is 1.25 BTC or $200. If the user decides to withdraw at this point, then Abra would buy 1.25 BTC back from a broker using the $200 they have stored in the exchange account from the conversion after the original deposit. Of that 1.25 BTC, Abra will use .25 to cover the user and the remainder (1 BTC) would go to pay back the amount borrowed in the first place, along with any interest. The result of all of this happening in the backend is that the user is made whole, Abra is made whole, and the original lender is made whole.
- The trades: In the example above, the Abra user never traded his or her money out of BTC. The great thing about the synthetic currency model is all of the same principles apply regardless of which synthetic asset the user purchases. For example, an Abra user could fund his or her wallet with $200 USD, buy some ether, maybe a little digibyte, convert that money back to USD, then convert it to Mexican pesos, and the buy more crypto — in the end, it really doesn’t matter because once the peg and the hedge are established in the multiple signature contract, then all of the adjustments that need to be made will happen via bitcoin scripts in the background. Abra is constantly adjusting, based on user activity, to avoid risk and be able to cover all trades should a user choose to withdraw (or send money to another user). It also means that Abra users have the ability to do their own hedging, or lock in crypto gains, during crypto market declines.
- The payout: When an Abra user wants to cash out and transfer their assets back to a bank account or an external crypto wallet they are effectively exiting the bitcoin smart contract and the assets that were stored as stablecoins on the blockchain are converted back to the currency of choice, which could be natively supported cryptos (we are adding more support all the time for native crypto) or back to fiat currency via a deposit back into a traditional bank.
Abra charges a small spread on the transactions that happen between the currencies on the app. The fees charged cover the borrowing costs associated with the hedge mentioned above, and to support the company so we can further develop the underlying technology and add more native cryptocurrencies and create more crypto-collateralized assets. On the subject of fees, it’s important to note that sometimes the companies we work with to enable deposits and withdrawals in and out of the Abra app via credit and debit card as well as bank accounts sometimes charge transaction fees. In most cases, we simply pass those fees on to the user and are always looking for ways to lower these fees.
What Abra’s synthetic currency model enables
Right now, Abra’s synthetic currency model enables simple crypto investing.
But this is just the beginning. Abra’s synthetic currency model will enable the creation of many other kinds of crypto-collateralized assets.
In the future, the same foundational synthetic currency technology can create investment opportunities out of traditional financial instruments such as stocks, commodities, and bonds. Using Abra’s synthetic currency, exposure to the price action of traditional stocks and indexes could even be fractionalized and made available globally in small dollar minimum amounts.
Besides investing, Abra’s synthetic currency model also allows users to transfer money easily from one Abra wallet to another Abra wallet and anywhere in the world. One of the biggest advantages is that the currency that one user sends can be different from the currency that the second user receives. In other words, user A can send bitcoin from his or her wallet, and user B will be able to receive that currency in ether or zcash, or even one of the fiat currencies such as Mexican Pesos.
Abra is more than another cryptocurrency exchange or another mobile crypto wallet. Instead, it’s like a gateway to a brand new kind of investing, all of which is powered by the unique, decentralized bitcoin/litecoin-based smart contracts.
Abra’s goal is to make investing simple and secure and to help make a more inclusive and equitable global financial system.
It’s time to be your own bank.
Join our community and find more people achieving their financial goals through crypto.
Download the Abra app on Android or iOS to begin trading or earning interest on cryptocurrency today!Download App
Established in 2014, Abra is on a mission to create a simple and honest platform that enables millions of cryptocurrency holders to maximize the potential of their assets. Abra enables both individuals and businesses to safely and securely buy, trade, and borrow against cryptocurrencies – all in one place. Abra’s vision is an open, global financial system that is easily accessible to everyone.
Based in the United States, Abra is available in over 150 countries and makes it easy to convert between crypto and a wide variety of local fiat currencies. With over 2MM customers, $7B in transactions processed, and $1.5B in assets under management, Abra continues to grow rapidly. Abra is widely loved and trusted – in April 2022, pymnts.com reviewed and rated Abra amongst the top 5 most popular crypto wallets in the market. Abra is backed by top-tier investors such as American Express Ventures and First Round Capital.
How Abra Protects Your Funds
Abra places clients’ financial objectives and security first. Abra practices a culture of risk management across all levels and functions within the organization.
Abra employs a state-of-the-art enterprise risk management framework that comprises a comprehensive set of policies, procedures, and practices detailing all applicable risk-related objectives and constraints for the entirety of the business. Abra has instituted a complete set of requisite systems and controls that continuously enforce these policies, procedures, and practices to manage all operations, including credit and lending. Abra’s independent Risk Committee comprises experienced compliance, risk, securities, and fraud operations professionals with backgrounds in industries ranging from traditional and digital assets banking, payments, remittance, to fintech.
Please visit our FAQ to learn more.
Matt1115 days ago
So I went to deposit money from my bank account and got a message that I can’t withdraw for 60 days from Abra once money was cleared, and something about a minimum balance requirement. This was something new, and I know you guys have been doing a migration, so I was wondering if you could give me a better clarification about this. I did not go through with the deposit, as this would seem to be an unreasonable amount of time, especially in the crypto world, to have my funds stored on an exchange. Aside from this new development, I’ve been a satisfied customer, and appreciate your time.
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Jonathan1366 days ago
So I dug deep into Abra, I think I understand the above; however, I still don’t understand how Abra deals with the following:
1) centralized oracle risks: while users hold the key to their own funds, the value of non-native funds is determined by a central oracle, which could be a central point of failure. Don’t Abra users have to trust a counterpart (centralized oracle) here?
2) Taxes: if Abra is hedging on their own books, Abra taxes surely won’t match up perfectly with user tax liability whether using FIFO or LIFO accounting. How is Abra dealing with this??
Jonathan1498 days ago
Thanks for the reply. I watched the video–my understanding is that Abra is holding collateral off-chain in the form of shorting via an off-chain btc futures contract, or taking an effective short position by simply selling borrowed btc on an exchange.
I don’t seem to be able to find any clarification as to how Abra is making the user whole if the price of btc drops. If Abra makes the user whole by buying btc back using off-chain collateral, but Abra is for some reason not fully collateralized and can’t cover the user’s long (say Abra loans out these funds and is illiquid, or its accounts are hacked or otherwise compromised), then there is significant counterparty risk to the user.
The only way this counterparty risk could be mitigated is by using a real-time pricing oracle that the smart contract refers to in order to live-adjust the amount of btc held in the smart contract. Furthermore, constant access to additional btc must be guaranteed in case the price of btc drops. In other words, given the pricing oracle is accurate and the smart contract updates with reasonable frequency, Abra can guarantee full solvency during price dips by over-collateralizing user funds in the smart contracts with borrowed btc (not by closing the btc short positions Abra takes on the exchanges, which is not a guarantee because it requires the user trusting Abra with non-transparent, off-chain collateral).
Counterparty risk is mitigated if Abra can guarantee this over-collateralization with borrowed btc. Is this the way Abra does it?
Jonathan1503 days ago
While Abra is not directly holding the user’s funds, are they not holding the collateral for these contracts in Abra’s exchange accounts around the world?
Then when users wants to redeem their funds, what happens if Abra’s exchange accounts get hacked and can’t purchase the BTC to true up on contracts?
Daniel McGlynn1502 days ago
Good questions. You should check out this recent talk at MIT. It goes into more depth on the topic.
Alan vasilisin1663 days ago
Hi,,I’m new to all this crypto currency, I would like to invest in carado ADA, but how do I exchange coins and have them placed in my original wallet from abra,,,,
Daniel McGlynn1663 days ago
I’m not sure I totally understand your question. Best bet is to email [email protected] and someone will help you out.
Asaf1706 days ago
If I understand correctly, the counter party risk is that if Abra defaults then user funds within the wallet are lost.
Am I correct?
Daniel McGlynn1706 days ago
Abra is a non-custodial wallet, which means that we don’t control any users funds. This post goes into a little bit more depth https://www.abra.com/blog/noncustodialwallet/.
anonymous coward1708 days ago
have been expecting this post for the community for a long time now, thank you.