Excessive Hotspots: Understanding the Essence of Algorithmic Stablecoins in One Article
Editor's Note: This article comes fromWebX Labs Daily (ID: gh_3bc595acebaf), reprinted by Odaily with authorization.
Editor's Note: This article comes from
WebX Labs Daily (ID: gh_3bc595acebaf)
WebX Labs Daily (ID: gh_3bc595acebaf)
The cryptocurrency DeFi market has set off a new upsurge. This time the focus is on stablecoins, and this time the stablecoins are obviously more imaginative, relying on computer codes to control the currency issuance in the virtual market, and can control The total currency issuance model paves a very attractive wealth story, and this new species is named algorithmic stable currency.
The above-mentioned mechanism to ensure the price stability of tokens by adjusting the supply is "rebase". When investing in price elastic tokens, gains or losses can be compounded and magnified. For example, at the beginning you bought 10 algorithmic stablecoins at a price of 100 US dollars, and then the target price was to stabilize at 10 US dollars, but the buying sentiment brought about by the investment boom will push the price to a higher level, and at the same time the algorithm is stable The coin mechanism will increase the total supply to try to stabilize the price, so that the algorithmic stable coins in the hands of users will be more than 10, and the price is the current price that has been raised. The money is more than $100. The consequences of the same losses may thus be magnified. Moreover, under the current heat, the mechanism of supply and demand adjustment may completely fail, because the market cannot bear the buying power brought by the heat. Why is the new species algorithmic stablecoin famous? The rise of algorithmic stablecoins has made products in this sector spring up like mushrooms. There are more than ten kinds of algorithmic stablecoins visible in the industry, among which AMPL is the simplest in logic. By increasing or reducing the number of tokens held by users, the target The price is maintained at around $1. This special setting determines that what users buy is not a constant AMPL token but a share of the AMPL market value. Here we need to mention Rebase: the currency stabilization method of elastic supply adopted by Ampleforth needs to increase or decrease the total amount of AMPL at 10:00 am Beijing time every day. The daily total amount adjustment is called Rebase, and all wallets Balances are subject to supply adjustments on a pro-rata basis. After the rebase, the proportion of token holders' entire network holdings is the same as before the rebase. Rebase is not a dilution, because all account balances are adjusted proportionally, whether it is a positive or negative adjustment, there is no airdrop or transaction related to the balance change in the wallet, but the AMPL smart contract function is at work. ESD can be regarded as the second generation of algorithmic stable currency, which is a mechanism that adds debt and coupons, which is relatively more complicated. There have been many articles on the introduction of algorithmic stablecoins, so I won’t go into details here. To sum up the overall basic logic in one sentence, several algorithmic stablecoins in the market are all based on the market operation mode of the central bank of the traditional fiat currency institution. This kind of reference uses the relationship between supply and demand and market scarcity to stabilize prices, completely replaces discretion with rules, replaces the central bank with algorithms, determines the amount of money to be increased through algorithms, and then determines the price of money through the money supply, which means that as long as the currency is controlled Circulation can determine the price level. However, the premise of this conclusion in the encrypted world is that the currency flow rate in the market is constant, but this is impossible in the encrypted market. Since the algorithmic stable currency enters the market, it is out of the management of the project party. The future depends on the degree of market recognition. For institutions similar to central banks, it is a very risky market verification experiment to rely on the most important monetary economic system on procedures that have not been verified by the market. The supply quantity controls the price itself is a way to stimulate economic activities. For algorithmic stablecoins without the support of the real economy, it is a behavior of giving up the basics and seeking the last. secondary title A dialectical look at the opportunities and risks of algorithmic stablecoins How does the algorithmic stablecoin work? Here we use the arbitrage algorithmic stablecoin and the dual-token algorithmic stablecoin to illustrate. 1. Arbitrage algorithm stable currency Arbitrage Algorithm The algorithm in the stablecoin itself faces great paradoxes and contradictions, the biggest of which is the key stability of reflexivity. The stablecoin derived from the algorithm is always at 1 ratio with the anchor currency in order to maintain its own value. :1 ratio (an example of anchoring the U.S. dollar hereafter), if the algorithm is used to maintain the 1:1 ratio of the U.S. dollar, it must provide arbitrage space for the market, that is, with arbitrage space, the currency price can be traded when it deviates from the price of 1 U.S. dollar. Profit, for example, if the current price deviates to 1.05:1, then use the right to sell in advance at this moment, then when the price returns to 1, you will get a profit of 0.05 US dollars. Visible arbitrage can keep the price stable to a ratio of 1:1, and at the same time Increase the market size and price stability of stable coins, but when the volume of stable coins reaches a large enough network scale, the price will gradually stabilize, and the increase in market liquidity will reduce the visible arbitrage space, and there will be no arbitrage space for reflexive transactions There is no value, and the market volume will be stagnant due to the problem of speculative trading. The problem of the paradox is that for the long-term stability of the market, a sufficiently large market value and market recognition must be required, and the initial market recognition comes from An arbitrageable environment, when the market environment grows, arbitrageurs will no longer recognize this market. Terra is a blockchain protocol enabling stable programmable payments and open financial infrastructure, powered by a basket of fiat-pegged stablecoins that are algorithmically stable by its native token, Luna. The Terra blockchain adopts a dual-token model, which are Luna tokens (staking and stable algorithm tokens) and the Terra stablecoin family anchored to legal currencies including the US dollar and Korean won. A simple summary is: users can mint Terra by burning Luna, or they can get equivalent Luna by sending Terra to the system. When the price of 1 TerraKRW < 1 KRW, users or arbitrageurs can send 1 TerraKRW to the system and get Luna tokens equivalent to 1KRW. At this time, the supply of TerraKRW in the system will decrease, and the price will gradually increase to the equivalent KRW; When the price of 1 TerraKRW > 1 KRW, users or arbitrageurs send Luna tokens equivalent to 1KRW to the system and get 1 TerraKRW. At this time, the supply of TerraKRW in the system increases and the price decreases, gradually approaching the equivalent KRW. Unlike MakerDAO’s stablecoin system, which uses assets on the chain to issue mortgage assets, the mortgage debt warehouse in MakerDAO has a corresponding relationship with the user who generates the debt. When the mortgage rate is too low, the user will face liquidation. In Terra, the supply and demand of tokens are adjusted through specific algorithms in the system and Luna tokens, and users do not have the risk of being liquidated. secondary title In the long run, is algorithmic stablecoin speculation or innovation? There is a strange logic circle in the current algorithmic stablecoin market: "I am optimistic about you because you are a stablecoin, but I vote for you because you are unstable."Algorithmic stable currency, as the name implies, is an algorithm that adjusts the total amount of currency in the market, increases market supply when the price of stable currency is higher than the anchor price, and recovers the supply when the price of stable currency is lower than the anchor price, or provides arbitrage space to balance stability coin price. The establishment of this model does not anchor real legal currency and does not need to mortgage stable currency. It is regulated by market will and algorithms, and the market is also called elastic currency.
Algorithmic stablecoins are not emerging now. From the source, it is an experiment in the reform of human currency. As early as 2014, some scholars published "Hayek Currency Cryptocurrency Price Stability Solution" and "Report on Cryptocurrency Stability: Controlling Currency Circulation", and the algorithmic stable currency Ampleforth that appeared in 2019 almost directly The above academic theories have been put into practice. In June this year, its token AMPL entered the industry field of vision with the help of DeFi, and in July 2020 it soared to a fully diluted market value of over US$1 billion. Until now, ESD, Base, etc. led by AMPL The skyrocketing market reshuffled the trading list, making the industry start to look at AMPL and other algorithmic stablecoins with admiration.
Let's take TerraKRW, a stablecoin anchored to Korean Won, as an example to illustrate how Luna guarantees the anchoring of Terra and fiat currencies:
