Authoritative Interpretation: The Development Trend of Algorithmic Stablecoins in 2021
As a converter between fiat currency and cryptocurrency, stable currency is not only a bridge between the real world and the encrypted world, but also an important infrastructure in the encrypted world, with a strong momentum of development. According to data released by CoinGecko, the current overall market value of encrypted stablecoins exceeds US$26 billion. If AMPL and ESD are included, there are already 10 stablecoins with a market value of more than US$100 million.
At present, there are various types of stablecoins on the market. Among them, algorithmic stablecoins have become the most topical stablecoins due to the explosion of DeFi. Are algorithmic stablecoins really stable and what are their development prospects? To this end, Roxe Payment Network invited Cao Yin, Managing Director of the Digital Renaissance Foundation, Zhao Wei, TokenInsight Partner, Ren Junfei, Founding Partner of Red Bank Fund, and Shipu, the core developer of Roxe Payment Network-Daollar Protocol, on February 4. , conducted an in-depth discussion on the development trend of algorithmic stablecoins, and Blocklike CEO Xiao Wan served as the moderator of the seminar.
The updated iteration of the stable currency
With the development of blockchain technology, stablecoins have been iterated at least three times. "Compared with the first-generation legal stablecoin and the second-generation digital asset-backed stablecoin, the third-generation algorithmic stablecoin represented by AMPL has the biggest advantage of being regulated by algorithms and mechanisms without using collateral. , is the stable currency that is closest to the ideal of blockchain decentralization.” said Ren Junfei, founding partner of Red Bank Fund.
As the most popular algorithmic stablecoin among stablecoins, it is also constantly updated and iterated in development. Cao Yin, managing director of the Digital Renaissance Foundation, pointed out that the first-generation algorithmic stablecoin represented by AMPL has neither currency shares nor Bond (bond), and adopts the simplest rebase mechanism. Different from AMPL, the model of the second-generation algorithmic stablecoin adds a bond system (such as ESD), but it is still not divided into currency and stock, that is, no token can be used as a share of the entire system. The third generation is an algorithmic stable currency represented by Basis Cash, which not only has the bond system invented by ESD, but also divides a token into three subsystems: BAC, BAS, and BAB, truly achieving the separation of currency and shares.
"However, I don't think there is much difference between the three iterations of algorithmic stablecoins. At present, there are many stablecoins anchored to different assets in the market, but in fact there is no need for so many stablecoins. Algorithmic stablecoins are used as a basic asset. , in order to be composable and interoperable in the DeFi system, it is necessary to choose large assets and assets with high utilization rates, such as anchoring BTC, ETH or US dollars, etc.” Cao Yin added.
Zhao Wei, partner of TokenInsight, believes that no matter how many iterations, "value stability" is the core of stablecoins. Currently, there is no truly stable stablecoin in the market. Strictly speaking, the current stablecoins are not real stablecoins.
Currently, the three types of algorithmic stablecoins on the market are represented by AMPL, ESD, and BAC respectively. "The emergence of AMPL is closely related to Uniswap. AMPL is a stable currency using the Rebase mechanism. Most centralized exchanges do not support this mechanism. Uniswap based on LP tokens is very friendly to AMPL and is also the basis for its development. ESD, BAC The principle is basically the same as AMPL, but it is relatively friendly to centralized exchanges. I personally still hold a wait-and-see attitude towards whether the algorithmic stablecoin on Ethereum can become a phenomenal application, after all, the user base is the largest problem.” Said Shipu, core developer of the Roxe payment network-Daollar protocol.
Differences within algorithmic stablecoins
In fact, several types of algorithmic stablecoins currently on the market are similar. Some are separated from coins and shares and bonded, and some are integrated with coins, shares and bonds (such as AMPL). There is not much difference in essence. "Compared with legal currency endorsement or over-collateralized stablecoins such as Maker and USDT, the current scale of algorithmic stablecoins is too small, which leads to the inability to form stability within algorithmic stablecoins, which in turn causes price fluctuations. However, it is still too early to make a conclusion Early on, as the scale of DeFi expands, there will be more possibilities for decentralized encrypted native algorithmic stablecoins, and whether the algorithmic stablecoins are really stable needs to be further tested by the market.” Cao Yin said.
Regarding the pain points currently faced by algorithmic stablecoins, Junfei Ren agrees with Yin Cao. She pointed out that the small overall market value makes the pool unable to achieve a stable effect, which is the biggest problem facing algorithmic stablecoins. "Compared with the first-generation and second-generation stablecoins with pledges, the algorithmic stablecoins based on market supply and demand are more affected by user sentiment," Ren Junfei added.
"There is no doubt that in the current encryption field, USDT is still the most influential stablecoin. However, due to regulatory pressure, the stability of USDT's currency value will be affected to a certain extent, while stablecoins like USDC, which are regulated by the United States, are safe. The stability is more secure, but these stablecoins are not truly decentralized and are not friendly enough to holders.” said Shipu, the core developer of the Roxe payment network-Daollar protocol.
Shipu believes that the current stablecoins in the market have certain deficiencies. A simple mortgage-type stablecoin like DAI, when there is a premium or less than $1, can only rely on the secondary market to adjust because it has no stabilization mechanism, that is, the price of DAI can be adjusted through everyone's trading and arbitrage. Pull back to $1. Algorithmic stablecoins without asset support, such as AMPL, ESD, and BAC, may enter a death spiral if no new users enter the market and no new funds continue to flow in.
"The central bank's algorithmic stable currency DO of the Roxe payment network can effectively solve the above problems. DO has the dual attributes of reserves and algorithms, that is, it has both algorithms as support and assets as collateral." Shipu added. In the Roxe payment network, there is a smart contract dedicated to the DO algorithm stable currency and the ecological token ROC - Roxe Reserve (RR). The execution of RR is not controlled by humans, and no institution or individual has the authority to operate it. assets. DO is issued as a pledge guarantee of Roxe's ecological token ROC, and roUSD adopts the central bank algorithm to implement price stability, and DO is an important token used to adjust market prices in the Roxe payment network. To put it simply, when the market price of DO is too low, that is, when DO is lower than the stability threshold, the production reduction mode will be triggered, that is, the algorithmic stablecoin protocol will automatically buy roUSD into DO and destroy it. After performing this operation many times , it will reduce the amount of DO circulating in the market, so as to achieve the purpose of raising the price of DO.
“I think stable coins can be divided into two categories: Rebase and seigniorage mechanism. Among them, the seigniorage mechanism is divided into three types: BAS integrated with a single token, BAS integrated with two tokens, and partial mortgage. I am more optimistic about partial mortgage. " Zhao Wei said.
Are algorithmic stablecoins really stable?
"Insufficient rebase is one of the reasons for the unstable price of algorithmic stablecoins, because Ethereum's GAS fee or speed has certain restrictions. In addition, there is also the impact of market sentiment. When the price falls, investors will panic. This further exacerbates price fluctuations. In other words, subject to the Ethereum network, algorithmic stablecoins cannot truly achieve stability.” Shipu believes that this problem can be solved through the following two solutions: one is mechanism mixing, that is, It has both mortgage and algorithm regulation; the second is that in addition to the circulation of algorithmic stablecoins on the Ethereum main network, a secondary network can also be added to accelerate, because no matter what type of stablecoin it is, sufficient circulation and real landing scenarios are important factor for its stability.
"From the perspective of value stability, I think pledge is necessary in the process from zero to one, but when there are more users and landing scenarios, pledge can be eliminated, but in fact this is a paradox, because without pledge means If it is not stable enough, users will not adopt it, just like USDT, which has been criticized, but is still widely used. Algorithmic stablecoins are more susceptible to market sentiment, but compared with USDT, which has a market value of nearly 27 billion US dollars, the current algorithm The stablecoin market is relatively small and has a lot of room for growth,” Ren Junfei said.
Cao Yin pointed out that the imbalance between supply and demand is the main reason for the price instability of algorithmic stablecoins. At present, there is only supply and no demand. At present, the only demand for algorithmic stablecoins comes from minting and mining within the system, but this demand is highly reflexive. To put it simply, the generation of demand depends on the mining brought about by the expectation of rising currency prices. On the contrary, if the bearish sentiment is strong, it will keep falling, and it is prone to skyrocketing and plummeting. "Finding the real demand is the fundamental solution to the stability of the algorithmic stable currency. For example, breaking through the inherent circle, using it as collateral or paying with it in some mortgage lending agreements, the demand generated in this way, the currency value will also be anchored to a certain Value, supply and demand balance is more conducive to stability.”
In this regard, Zhao Wei holds a different view. He believes that if the algorithmic stablecoin is to be stable, the most important thing is to meet the demand, not to find the demand. "At present, USDT and USDC can meet all the needs of the chain and off the chain. Algorithmic stablecoins do not have better advantages. It is not easy to occupy the market. I think that whether it is for ordinary users or professional quantitative teams , the real demand is actually risk-free arbitrage.” Zhao Wei further added.
The Future Landing and Direction of Algorithmic Stablecoins
At present, all stablecoins based on Ethereum realize their value through DeFi applications. "I am more looking forward to an algorithmic stable currency other than Ethereum. This is exactly the direction Roxe is working on. DO can be circulated on our main network in addition to Ethereum." Shipu said that only when the currency is widely used Its maximum value can only be exerted in various scenarios. For example, the current Ethernet network cannot meet the payment needs of daily buying and selling goods in some areas in Africa where there is no currency and other means of payment. If stablecoins want to realize high-frequency and small-amount payments, they must overcome difficulties such as high gas fees and inconvenient (must hold ETH).
Ren Junfei believes that cross-border payment is the largest application field of stablecoins in the future, which can effectively solve the current pain points of high transfer fees, low efficiency, and long cycle through SWIFT. At the same time, she is very much looking forward to the landing of Facebook's Libra (renamed Diem).
"For the stablecoin market, decentralized algorithmic stablecoins are the best alternative to deal with extreme situations. Although it is unlikely that all governments will ban fiat currency stablecoins, as the volume of stablecoins continues to expand, it is still There may be such an extreme situation, or governments may directly incorporate stablecoins into the banking management system, and then KYC, licenses, reserves, etc. will be required, which is not friendly to users. The disadvantage of collateralized stablecoins is that funds The utilization rate is not high and cannot meet the demand for stable coins in the DeFi market, and algorithmic stable coins can effectively avoid the above problems.” Cao Yin said.
According to the data, the issuance of US dollar stablecoins on Ethereum reached US$26.5 billion at the end of January, an increase of US$5.5 billion compared to the previous month. Among them, the issuance of USDT increased by 2 billion, USDC increased by 1.8 billion, and DAI increased by 460 million. It can be seen that stablecoins have become one of the most stable assets with rising market value, which will also provide a broader development space for algorithmic stablecoins.
