Algorithmic Stablecoins: A Game Between Programs and Human Nature

Editor's Note: This article comes fromHoneycomb Finance News (ID: fengchao-caijing), Author: Kyle, reproduced by Odaily with authorization.

Editor's Note: This article comes from

Honeycomb Finance News (ID: fengchao-caijing)

Honeycomb Finance News (ID: fengchao-caijing)

, Author: Kyle, reproduced by Odaily with authorization.

The emergence of Basis Cash has given the outside world a different definition of stablecoins. Through the elastic supply adjustment mechanism, Basis utilizes Basis Cash (BAC), Basis Bond (BAB) and Basis Share (BAS) in the system, and relies on the dual power of the market and algorithms to keep BAC stable at around $1.

IOSG Ventures, a venture capital institution in the encryption industry, made a vivid analogy, that is, BAC, BAB, and BAS are regarded as the US dollar, US dollar treasury bonds, and Federal Reserve stocks, respectively.

Compared with USDT and DAI, Basis's model not only guarantees decentralization, but also does not require asset collateral. It wants to take advantage of people's profit-seeking nature and rely on the market and algorithms to mint stable coins.

It is regarded as a currency reform by many people in the industry, but there are also other arguments that the three exercise tokens in the algorithmic stable currency do not have full redemption rights and profit support, and are completely dependent on the capital investment of later generations , has a Ponzi color.

What is even more comical is that seeking to use an algorithm to stabilize the currency price is often due to human greed or fear, causing the stable currency to be unstable. Either it is higher than the $1 anchor, or if it falls, it will not rise back to $1. After Basis became popular, a series of "imitations" quickly appeared in the algorithmic stablecoin sector, and the existing projects were suspected of being cashed out by the development team. After the currency price fell below $1, no one cared about it.

Algorithmic stablecoins also present two sides of the coin, surrounded by applause and skepticism. Under the hot appearance, whether the algorithmic stablecoin can enter the market, it needs to continue to experiment before the results can be obtained.

secondary title

Basis Explodes, Algorithmic Stablecoin Brings DeFi Trend

Basis wants to mint a stablecoin pegged to $1 through an algorithmic adjustment of the currency supply mechanism. This is different from the more familiar USDT and DAI.

USDT is endorsed and issued by the centralized entity Tether. The essence is to guarantee the rigid payment of 1 USDT and 1 USD by reserving assets such as US dollars in the bank. Its disadvantages are obvious. First, Tether’s asset reserves in the bank are opaque, and there may be over-issuance; second, USDT has always faced regulatory risks and is prone to thunderstorms.

DAI is a stable currency generated on Ethereum through over-collateralization of assets such as ETH. Compared with USDT, it is more decentralized and has a stronger ability to resist censorship. However, the over-collateralization mechanism has led to a low asset utilization rate.

Basis takes an unprecedented approach to "redefining" stablecoins. There are three roles in the Basis system, namely BAC (Basis Cash), BAB (Basis Bond) and BAS (Basis Share). Among them, BAC is a "stable currency" whose value is anchored at US$1, BAB is equivalent to a bond, and BAS is equivalent to the equity of the issuer. Both BAB and BAS are designed for the goal of "BAC is equal to $1".

image description

Basis Cash page

BAC (cash) and BAS (equity) can be generated through pledge mining/liquidity mining. The initial mining will limit the supply, which leads to the price of BAC far exceeding $1 at the beginning of the project. And when the token supply is adjusted (rebase), the system will issue a certain amount of BAC through the algorithm, so that the price of BAC will return to $1. AMPL, the first-generation algorithmic stablecoin, was designed in this way.

Unlike AMPL, when the price of BAC is below $1, users can use BAC to buy "bond" BAB. The price of BAB is set to the second power of BAC. For example, if the price of BAC is $0.9, then the price of BAB is 0.9*0.9, or $0.81, which is equivalent to buying at a discount. BAC as a purchasing power will be destroyed to achieve a deflationary effect.

If the subsequent BAC rises above $1, the BAB (bond) in the user's hand can be exchanged for BAC at a 1:1 ratio, and there will be a price difference in the middle, and the user can earn the difference.

Another token, BAS, is used as equity, which can be obtained by providing liquidity to the two trading pairs BAC-DAI and BAS-DAI. These equity can be exercised after BAC is issued additionally. For each additional issuance of BAC, the system will repay the bond first, and users can use BAB 1:1 to exchange for additional BAC; the remaining BAC will be distributed to BAS holders as dividends.

Users who want to obtain equity (BAS) need to carry out liquid mining, and mining needs to buy BAC or BAS, which will increase the demand for the two currencies (Note: the initial 50,000 BAC is pledged by 5 stable coins The pledge pool for generating and completing the initial issuance of BAC has been cancelled).

When BAC is higher than $1, dividends will be distributed to BAS holders; if it is lower than $1, deflation will occur, and arbitrage space will be created for users by issuing BAB bonds. Basis uses this method to ensure that the price of BAC remains at around $1.

IOSG Ventures, a venture capital institution in the encryption industry, made a vivid analogy, that is, BAC, BAB, and BAS are regarded as the US dollar, US dollar treasury bonds, and Federal Reserve stocks, respectively. Putting these concepts into it, you will find that the minting issuance of BAC is similar to the issuance of US dollars.

Due to the high income of early liquidity mining, Basis quickly became popular once it was launched. Just as Uniswap has led to the birth of a large number of AMM (Automatic Market Maker) exchanges, many developers have also imitated Basis and produced "imitation disks" on different blockchain networks. For example, there are Basis Coin and Mith Cash on Ethereum, which are popular There is Basis Gold on the coin ecological chain Heco chain, and USDX on the EOS chain.

secondary title

Hidden capital risk behind innovation

In the view of IOSG Ventures, algorithmic stablecoins such as Basis have the characteristics of decentralization and resistance to censorship. It has created a unique way of stabilizing the currency price, without needing to mortgage other assets, making full use of people's profit-seeking characteristics, and regulating it entirely by market will and algorithms, and has the opportunity to realize a truly decentralized stablecoin for the first time.

In today's encrypted asset market, participants have realized the strong demand for assets such as stablecoins on exchanges and blockchains. However, the existing stablecoins in the market have their own disadvantages. For example, USDT issued in a centralized manner has the risk of opacity and weak resistance to censorship, while the stablecoin DAI issued by pledging other assets has the defect of low utilization rate of funds caused by capital lock-up. The emergence of Basis seems to allow people to see a new way of generating stablecoins.

Some people in the industry believe that the potential of algorithmic stablecoins and algorithmic synthetic assets is unlimited. As centralized stablecoins are subject to increasingly strict supervision, the demand for algorithmic stablecoins may increase significantly, and even become the mainstream choice.

However, at present, algorithmic stablecoins such as Basis are still in the experimental stage, and the idealization of the adjustment mechanism cannot keep up with the reality of the market. For example, due to liquidity mining incentives, the market demand has surged, and it has entered a bubble stage. Even after many rounds of rebase, the price of many algorithmic stablecoins is still higher than $1, which makes the "stablecoins" seriously unanchored and extremely unstable.

And when rewards decrease or disappear, or there is no new capital entering the market, algorithmic stablecoins may experience systemic risks. For example, when a certain algorithmic stablecoin falls below $1, the market is unwilling to convert it into bonds, but sells it directly, which may cause the stablecoin to enter a death spiral and fall rapidly.

There are already precedents. The "imitation disk" Basis Coin's algorithmic stable currency BCC has fallen to around $0.5. There are outside rumors that its founding team smashed the market and ran away. After the market lost confidence in it, the situation was naturally that funds fled and its "self-balancing system" was destroyed.