Explain in detail why the four types of algorithmic stable coins become unstable "bouncing coins"

Text | Meditations Editor | Produced by Tong | PANews

Stablecoins have been hailed as the "crown jewels" of cryptocurrencies. In the Bitcoin white paper, Satoshi Nakamoto believes that Bitcoin is a peer-to-peer electronic cash system, but the cryptocurrency represented by Bitcoin is difficult to serve as a standard of value in reality due to large price fluctuations, and the lack of currency” value scale” function. The stable currency solves this problem very well. It not only has the advantages of cryptocurrency without borders, fast transfer, transparent transaction, etc., but also has a relatively stable value. As the most widely used stablecoin, USDT has a circulation exceeding 20 billion and has replaced BTC as the medium of exchange between cryptocurrencies.

Algorithmic stablecoins only began to be recognized by the public in the summer of 2020. It is a kind of stablecoin. It has neither the relative centralization of fiat-backed stablecoins nor the low utilization rate of over-collateralized stablecoins. However, the current several algorithmic stablecoins have not yet realized the core function of stablecoin "value stability". This article will introduce in detail the currently popular algorithmic stablecoin projects. It is suitable for beginners who are interested in algorithmic stablecoins to read, and skilled players can also learn new things by reviewing the past.

secondary title

1. The rebase class represented by Ampleforth

Ampleforth, one of the most well-known algorithmic stablecoins, works by increasing or decreasing the supply of AMPL in order to keep the price of AMPL near one dollar. Unlike other types of stablecoin projects, Ampleforth uses the rebase operation to change the AMPL held by all users as a whole. The price referenced during rebase is based on the volume-weighted average price in the past 24 hours. When the price is higher than $1.05, the AMPL balance in all users’ wallets will increase at the same time; when the price is lower than $0.95, the AMPL balance of all users will be increased simultaneously. reduce. During this process, the proportion of AMPL held by users in the supply will not change.

Although Ampleforth believes that there is a strong correlation between cryptocurrencies today, AMPL can be decoupled from the price of cryptocurrencies such as Bitcoin through the incentive method of AMPL, thereby enhancing the diversity of assets and reducing systemic risks. However, so far, AMPL has not solved this problem, and this has become a defect of AMPL. There are several reasons why AMPL cannot guarantee value stability when the market fluctuates, and even amplifies such fluctuations.

• Rebase-type tokens such as AMPL are naturally more suitable for trading on decentralized exchanges such as Uniswap. Decentralized exchanges can automatically complete rebase operations through algorithms to increase or decrease wallet balances. On the other hand, centralized exchanges need to obtain the balance changes on the chain first, and then increase or decrease the balance in the user's wallet. During this process, functions such as transfer and transaction are more difficult to realize. Gate.io once failed to follow up the rebase on the chain in time, causing losses to users and itself.
• The decentralized exchanges in the Ethereum network mainly use ETH as the trading medium. In the v1 version of Uniswap, it is even mandatory that all ERC20 tokens can only establish trading pairs with ETH, and transactions between ERC20 tokens are traded in ETH. As an intermediary, it is implemented through routing. In the v2 version, although it is free to choose, it is still dominated by ETH, and the liquidity of AMPL in Uniswap is also on the AMPL-ETH trading pair. According to this method, when the cryptocurrency falls as a whole, without the participation of external forces, AMPL will inevitably fall with the decline of ETH; of course, ETH can also drive AMPL to rise.
• When the market falls, AMPL will inevitably encounter sell-offs, and as the price of AMPL falls below $1, the value of AMPL held will shrink due to the price drop, and the number of AMPL tokens in the hands of users will also decrease. It will amplify the panic among users and lead to further sell-offs. When falling, AMPL can easily form a death spiral; when rising, it can easily form an upward spiral.

Therefore, AMPL usually performs better than other cryptocurrencies in a bull market, but it also performs poorly in a bear market, acting as an amplifier for the market. In July 2020, the number of AMPL issued increased by 57 times, and the market value increased by 23 times when the price fell by 58%.

The emergence of Yam has brought the heat of the market to a climax. Yam tokens are distributed fairly through mining, and tokens can also be used for governance. But after more than a day on the line, Yam failed because of a logical error in rebase. The subsequent Yam v3 version retained the rebase function, but it was not as pure as AMPL. The 5% of Yam's forward rebase will not be distributed to users, but will be sold directly in Uniswap's YAM-ETH trading pair, and the exchanged ETH will be deposited into the treasury.

Subsequently, there appeared projects such as Antiample (XAMP) whose tokens only decreased but not increased, as well as projects anchored to other cryptocurrencies, such as Soft Link anchored to LINK. Many imitation disks come and go quickly, and have disappeared from people's vision.

PANews has analyzed Rebase tokens before, please click to read more. "secondary title》

2. Pledge lockup represented by Empty Set Dollar

The current supply of ESD is 510 million, and the market value is 378 million US dollars. Although the price of ESD has fallen by nearly half from the high point, the market value of Empty Set Dolla still surpasses Ampleforth, and it is currently the algorithmic stable currency project with the highest market value. ESD is not only a stable currency, but also can represent the equity of tokens issued through DAO. By staking ESD, users can obtain rewards for increased supply and participation in governance.

The price stability of ESD is also based on an elastic supply model. When the ESD price is higher than $1 and the protocol needs to increase the supply, new ESD tokens will be minted, and these tokens will be distributed to pledgers; if there are outstanding debts in the system at this time, these debts will be repaid first . When the price of ESD falls, users can choose to destroy ESD to buy bonds at a preferential price. If the price is higher than $1 again, the bond can be redeemed for ESD at 1:1. If the bonds are not called within 30 days of purchase (price less than $1), the bonds will be destroyed and all assets corresponding to the purchased bonds will be lost.

In the first 30 days of ESD issuance, the price oracle of ESD is set at 1.1USDC, and during this period, the supply of ESD increases by 10% every 8 hours. Early participants in ESD have gained hundreds of times.

Different from other projects, Empty Set Dollar also introduces a locking mechanism. In the case of no debt in the system, the additional ESD will not be distributed directly to ESD holders, but will be rewarded to pledgers of ESD and LP token of Uniswap ESD-USDC. When exiting, the unlocking time of ESD and LP token is 15 epochs and 5 epochs respectively (each epoch is 8 hours). Because a large amount of ESD is locked, when the market value of ESD has reached hundreds of millions of dollars, there is very little ESD in external circulation. This is why ESD is considered by many people to be a capital market. This mechanism can easily cause a death spiral when it falls. .

Given that the current supply of ESD is already very high, no matter whether it is higher than $1, the cost performance of participating in ESD is not good, and there is a risk of total loss of principal when buying bonds.

secondary title

3. Multi-token category represented by Basis Cash

Bssis Cash forked from Basis, a project that was closed due to supervision. Basis Cash separated its equity tokens and retained bonds. Therefore, the agreement includes three types of tokens, Basis Cash (BAC) and Basis Share (BAS) and Basis Bond (BAB), where BAB is non-transferable. BAC is one of the stablecoins, anchored at $1; BAS is an equity token that can distribute newly minted BAC tokens; BAB is a bond, and the price of BAB is equal to the square of the BAC price. For example, when BAC is $0.7, the price of BAB for 0.7BAC ($0.49).

Like ESD, when BAC is above $1, the system first allows bondholders to redeem BAC. If there is still BAC generated at this time, it will be allocated to Boardroom in the form of seigniorage, and users will mortgage BAS to earn BAC's daily seigniorage.

The tokens in Basis Cash are distributed in a fair manner. At the beginning, a total of 50,000 BAC will be distributed to 5 stable currency pools, and BAS will be rewarded to Uniswap LP token pledgers of BAC-DAI and BAS-DAI.

The difference is that Basis Cash separates stablecoins and equity tokens, so that BAC will not be affected by the selling pressure of equity tokens. The seigniorage tax is also charged for the pledged tokens. If the ESD pledger wants to release the pledge and sell it in the market, the price of ESD in the secondary market will drop. But in Basis Cash, the sell-off of BAS will not directly affect the price of BAC. In this way, the price of BAC will be more stable than that of ESD, and BAC will be more practical.

At present, Basis Cash has been online for more than 30 days, and BAS has also experienced its first reduction in production. When production was reduced, the price of BAS continued to rise, attracting many users.

secondary title

4. Some algorithmic stablecoins represented by Frax

Frax is the first partially algorithmic stablecoin project. Based on the existing algorithmic stablecoins, it adds the concept of using partial stablecoins as collateral assets. There are two tokens in Frax, the stablecoin FRAX and the governance token FXS. Minting the stablecoin FRAX requires the consumption of the stablecoin USDC and the governance token FXS, and only USDC is consumed during the genesis stage. The initial mortgage rate is 100%, that is, all USDC mortgages are used to mint FRAX, and then the mortgage rate is adjusted every hour. If the price of FRAX is greater than $1, the mortgage rate will be reduced and the share of FXS will be increased; if FRAX is lower than $1, the Raise mortgage rates. The mortgage rate is adjusted every hour, and each adjustment is 0.25%.

As expected, after the launch, due to the popularity of algorithmic stablecoins and the scarcity of FXS, the mortgage rate will continue to decrease, while the price of FXS will continue to rise. However, in the actual process, it did not meet expectations, and there are some places worth thinking about.

• The Frax project has private placement, and part of it will be unlocked soon. Participation is not fair enough, resulting in a lack of admission of large funds.
• Even so, the coinage of FRAX exceeded 20 million US dollars within 1 hour. However, due to the existence of the FRAX-ETH trading pair, ETH fell shortly after Frax went online, causing FRAX to fall passively to less than one dollar, and the mortgage rate gradually rose to 100%, insufficient consumption of FXS.
• Although there is a price stabilization mechanism in the project, part of the fees will be deducted by the system when minting and redeeming coins. Therefore, when the price of FRAX is lower than $1, arbitrageurs are not willing to buy back FRAX from the market due to the high cost. Destroy FRAX to redeem USDC.

Summarize

Summarize

The current algorithmic stable currency projects are still in the experimental stage, and cannot achieve price stability, and may even amplify market fluctuations. Judging from the current situation, only projects in the Ethereum network have received relatively large financial support, while projects on other blockchains may only have a few million dollars in locked positions. Algorithmic stablecoins are very dependent on the innovation of mechanisms. Some mechanisms come directly from academic papers. If a sufficiently good mechanism can be designed, it may lead to the application of algorithmic stablecoins. In addition, in the LP token mining stage of the algorithmic stable currency, especially relying on the professional knowledge related to game theory, ordinary users can participate in the stable currency at the beginning.