DeFi Legendary Investor Bill: Everything About Algorithmic Stablecoins
Author of this article: Bill, reprinted with permission.
Bill, the founding partner of Fair Launch Finance, was involved in the development of projects including YFI, Chainlink, Synthetix, and AAVE early.
The following is an exclusive interview with stable currency investor Bill The Investor:
1. What is the relationship between algorithmic stablecoin, non-collateralized stablecoin, elastic currency and rebase?
answer: Algorithmic stablecoins are stablecoins relative to collateralized ones, and they are the same concept as non-collateralized stablecoins. Elasticity is the Chinese translation of rebase. Elastic currency refers to the currency that controls the currency's purchasing power by controlling the currency issuance. The monetary quantitative easing policy that we often hear actually refers to the mechanism of elastically controlling the currency issuance. The currencies issued by countries such as the U.S. dollar and RMB that we are most familiar with are actually flexible currencies, which are non-collateralized currencies. The currencies issued by these countries are not mortgaged by physical assets such as gold and land, but are guaranteed by national credit. When the national credit crisis occurs, the national monetary system collapses. These things have happened in countries such as Zimbabwe, Argentina, and Venezuela.
2. Why are you optimistic about algorithmic stablecoins?
answer: The blockchain is a decentralized platform, and most of the most widely used stablecoins on the blockchain are currencies issued by centralized platforms, such as USDT, USDC, TUSD, etc., and a small part of them are mortgaged by other digital currencies Decentralized stablecoins, such as DAI, SUSD, etc., neither the centralized stablecoin nor the collateralized stablecoin conforms to the development concept of complete decentralization. Compared with the completely decentralized and unsecured features of Bitcoin You can understand why.
2–1. From the perspective of mechanism design, why do you think that algorithmic stablecoins can achieve stability?
answer: Stablecoins issued by countries like the U.S. dollar and RMB, which are essentially algorithmic stablecoins, have been in operation for many years and have accumulated rich operating experience. People worry that there will be many problems with the non-collateralized U.S. dollar, but after decades of operation, the U.S. dollar still maintains its status as the global currency hegemony today. The U.S. dollar is issued and traded through U.S. dollar bonds, and the adjustment of U.S. dollar and U.S. bond interest rates ensures the relative stability of the U.S. dollar , and the algorithmic stable currency in the digital currency is actually developed by simulating the stable legal currency model issued by the country. The US dollar can develop stably, and the algorithmic stable currency will also be able to develop stably.
2–2. From the point of view of someone who wants to use stablecoins, why would he choose algorithmic stablecoins?
answer: People who hold stablecoins hope that their assets can remain relatively safe and stable, which implies three requirements: 1. The stablecoins I own will not be confiscated by any organization one day. 2. The price of my stablecoins should be Keep the same price as the benchmark fiat currency 3. My stablecoin has sufficient liquidity and can be redeemed at any time for its benchmark fiat currency for purchases in real life.
For the first security requirement: because the centralized stablecoin is a centralized issuance mechanism, in theory, the centralized issuer can freeze the stablecoin in any address, which is similar to the fact that the country can freeze any one of any bank. There is no difference in the account number. For example, Tether has frozen USDT in a large number of wallet addresses for various reasons.
The second requirement for stable currency value: this is the current direction of various innovations. Various innovative projects are trying to find an algorithm and mechanism that can ensure the long-term stability of the currency value and the benchmark currency. The earliest successful case in this field It is DAI, which stabilizes the value of the currency by staking ETH + voting in the governance community to determine various parameters. However, the problems of DAI are also obvious, including low capital efficiency caused by staking, and slow voting response speed, which leads to a large number of accounts being liquidated when the ETH price fluctuates violently. There is no negative interest rate As a result, the price of DAI has been above $1. After DAI, more and more excellent and stable models have emerged, such as ESD, BASIS, etc. It is only a matter of time before these algorithm-based stablecoins succeed and surpass the total market value of DAI.
For the third issue of stablecoin liquidity: algorithm-based stablecoins are still in the early stages of development, and the community is still making various attempts. For example, ESD solves the problem of currency price stability, but the single currency design limits ESD to We are looking forward to the development of BASIS because it seems to solve the three problems we discuss here at the same time.
Going back to your question of why you use an algorithmic stablecoin, if there is a stablecoin that can perfectly solve the above three problems, it will definitely get a lot of market applications, and it seems that only algorithm-based, decentralized issuance of stablecoins Coins can solve these problems at the same time.
3. It is undeniable that at the current stage, many people participate in a certain algorithmic stablecoin not to hold a certain stable stablecoin, but to make a profit. What do you think of the relationship between "speculators" and algorithmic stablecoins, for example, Are speculators helping to scale this algorithmic stablecoin? Are speculators helping to achieve stability? And, if the FOMO sentiment subsides and the "speculators" leave the market, will the algorithmic stable currency be unstable, or the consensus quickly disappear? When it comes to rebase, one thing people often talk about is the death spiral. What do you think of the death spiral? Is there a reasonable mechanism to resolve the death spiral?
answer: The initial stage of any financial market is supported by speculators. Looking back, the stock market and financial derivatives market all follow this law. The digital currency market is also developed to the scale it is today through the joint efforts of believers and investors .
In the early days of financial innovation, any new model will first gather a group of speculators to enter first. If this model does not have long-term development value and cannot continue to attract more speculators and long-term investors, it will enter a death spiral. The long-term value development model will attract more and different roles to participate, from speculators to long-term value investors to end users. Once its use is expanded to end consumers, this model will be successful. We can take this development process In analogy with the process of venture capital, venture capitalists are actually speculators who continuously increase the probability of success. When they help an entrepreneurial project succeed, they will exit and continue to look for greater speculative opportunities. But at the same time, we must see that the vast majority of startups invested by venture capitalists have entered a death spiral.
An extended discussion may also be combined with the above question. I feel that the evolution of algorithmic stablecoins has separated two roles: those who help stabilize and those who hold stablecoins, that is, speculators And the people who use it, do you think so?
So, will speculators leave the market in a death spiral, causing the currency to be unstable? Or do you think there is a situation where the stablecoin is no longer attractive to speculators?
I see you don't encourage prudent investors to buy bonds, why? If everyone does not buy bonds, will they enter a death spiral?
answer: This question is consistent with the previous one. If the stablecoin project does not have a design mechanism to attract more roles, speculators will definitely leave quickly, and it is even less likely to attract more users.
I don't encourage everyone to buy bonds in ESD because its bond design is flawed, which will lead to the risk of zero investment for investors. The bond design for sustainable development should be a bond that can be priced and traded by the market in a wider range of DEXs, instead of being kidnapped by the ESD platform as it is now or waiting for zero or using more funds to unwind the set.
4. Taking BASIS as an example, it should be an algorithmic stablecoin that is more reasonable than other algorithmic stablecoins in terms of mechanism, at least at the current stage? But we see that its stable currency BAC is unstable. Does this mean that the mechanism design of BASIS has not been successfully operated? What do you think is the reason for the current situation, and is it possible that this situation will disappear in the future? Is it possible for BAC to become a real stable currency? Or do you think that the situation of BASIS is related to its own mechanism design, which is more difficult to overcome and needs to evolve a better algorithmic stablecoin mechanism?
answer: Judging from the current comparison, BASIS is the best design compared to other stablecoins, mainly reflected in the following aspects:
1. The dual currency design solves the problem of ESD single currency hindering circulation. BAC can be better circulated to a wider range of applications because there is no potential expectation of rebase. This application model is similar to DAI for circulation and MKR for governance. Stablecoins cannot have long-term value if they cannot solve the long-term wider circulation problem.
2. A treasury has been added to the bond design. During the inflation period, the treasury is first filled and then inflated to the BAS holders. This method improves the problem of intense conflict between bond holders and the long-term development of the project in ESD.
3. The bond directly adopts the currency BAB based on the ERC20 standard. BAB will be applicable to various DEX and CEX transactions. This method will guarantee the interests of bondholders and will form a huge bond trading market similar to US dollar bonds.
BASIS is still in the period of fair launch, and has not yet started a formal rebase. During the release period, it adopted the method of controlling the total amount of BAC to mine the governance currency BAS, which led to a large number of miners needing to purchase BAC to Mining BAS, this is the reason for the soaring price of BAC. After the rebase, the circulation of BAC will increase sharply and the price will return to $1.
Can you briefly analyze the three roles in BASIS, BAC, BAB, BAS, what are their respective functions? What do you think is the ingenious design of this mechanism, and where are the possible problems?
Compared with ESD, BASIS has the role of BAS. Do you think this role is necessary? Why?
answer: The simplest analogy is BAC=US dollar BAB=US dollar treasury bond BAS=Fed stock. The ingenuity of this design is that it moves the entire US dollar issuance system into the BASIS design. And in the design of the ESD, the ESD plays the role of both the dollar and the stocks of the Federal Reserve, which is a major problem in its design. Do you think BAS is necessary as a voting and dividend stock for the currency governing body?
5. You divide the development of algorithmic stablecoins into three stages, and the third stage is "partial mortgage + partial bond market regulation". In your opinion, is this a better mechanism and why? What are the benefits of introducing fractional collateral? Or what problems can be overcome in the mechanism? What is the purpose of part of the bond, or why is this part of the bond necessary, and how does it help this stable currency?
answer: Completely unsecured stablecoin due to its equal issuance mechanism will cause large funds to control a large number of coins in the early stage without occupying too much money and affect the long-term development of stablecoins by manipulating currency prices and the market. The BAC/ BAS price fluctuations are caused by this reason. The introduction of partial mortgages will curb the impulse of large funds to arbitrarily hit the market and avoid entering the death spiral due to liquidity exhaustion.
Bonds are a mechanism used to ensure that the balance of existing accounts remains unchanged when entering a deflationary state, and are an important means of stabilizing currency prices. DAI is not a real stablecoin because it has no deflation mechanism design and its price has been higher than $1 for a long time.
From past experience, simple things (especially when it comes to mechanism design) are more likely to succeed. Personally, I feel that the third stage is not simple enough. What do you think of this problem?
The third stage design can combine the advantages of mortgage and elasticity, but it can also have the disadvantages of both mortgage and elasticity. What do you think about this problem?
answer: The financial system itself is a complex system. Simple use is relative to users. In the design of BASIS, as long as the use of BAC is extremely simple, it is enough. In fact, this goal is easy to achieve, that is, BAC=USDC is completely consistent way of using. BAC users do not need to understand what BAS and BAB are, just like the vast majority of DAI users do not know the existence of MKR. As for the users of BAS and BAB, most of them will be professional financial practitioners, and they all need these.
6. Many people think that the operation of the algorithmic stablecoin system depends on the new inflow of funds. What do you think? Can it run robustly without new money coming in?
answer: Any financial market needs the recognition of the market and the continuous circulation of funds. The final winner should have a platform that can continuously attract more financial players to enter. Without the approval of the market and funds, any project will be a dead project.
7. Do algorithmic stablecoins need a strong consensus? That is, if there are not many people participating in an algorithmic stable currency, will it not be established?
answer: Algorithmic stablecoins require a strong consensus, which is no less than the consensus similar to Bitcoin, so this market is a market with ultra-high risk and ultra-high return. Why does it exceed the return? Because you participate in the mint at almost zero cost in the early days.
Bill's Twitter account:https://twitter.com/billtheinvestor
