How Algorithmic Stablecoin Gyroscope Can Solve the Composability Risk of Meta Stablecoins

Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc)Editor's Note: This article comes from

Babbitt Information (ID: bitcoin8btc)

Babbitt Information (ID: bitcoin8btc)

, by Ariah Klages-Mundt, compiled by: Overnight's Porridge, published with permission.

This article is about the comparison part of Meta-stablecoin, and the following parts 2 and 3 are about the comparison of algorithmic stablecoin, managed stablecoin and leveraged stablecoin.

The so-called meta-stablecoin (Meta-stablecoin) refers to a stablecoin composed of a basket of other stablecoins.

The idea of ​​this design is that a basket of stablecoins can diversify the risk of individual stablecoins, which is correct to some extent, but it also faces a new type of risk, which we call composability risk, Or a problem in one system can affect other systems.

image description

Composability Risks Faced by Meta Stablecoins

A basket of meta-stablecoins takes Liquidity Provider (LP) positions in an Automated Market Maker (AMM). Since these capital pools are markets established on decentralized exchanges (DEXs), the weight of the baskets changes in the form of tokens in response to transaction demand. Therefore, in addition to the potential stablecoin risk, the meta stablecoin also bears the inherent LP risk of AMM.

image description

yUSD composability risk, the failure of components in any layer will cause the meta stablecoin to be affected

Because of this choice, the yUSD stablecoin faces significant composability risk, which amplifies problems in any single component. To be fair, the Curve pool is earning income by taking this risk, but for ordinary users, this risk may not be realized. A similar situation applies to mStable, but its risk control is slightly Better yet, a problem with Aave, Compound, or any of the three stablecoins will render mStable invalid. In addition, the failure of a single stablecoin will cause the value of the mStable stablecoin to drop by 33%.

image description

Gyroscope stratifies composability risks, failure of a single vault does not cause cascading effects

Gyroscope solves this problem by layering composability risk while maintaining capital efficiency. The principle is to divide the reserve into lower level vaults and carefully control the risk. In this way, the various vaults There is little risk of overlap. Therefore, the failure of a single vault will not affect the remaining vaults. If there is a problem with a vault, the Gyroscope system will maintain the stablecoin at $1 through the anchor coordination mechanism (described in detail here). After a vault fails, the Gyroscope reserve can also be recovered through the yield of the remaining vaults.

A basket of meta-stablecoins can also have static weights in the form of tokens, which is more similar to an exchange-traded fund (ETF), which is how the Reserve protocol stablecoin works. However, unlike the Gyroscope, this mechanism cannot maintain the peg if the Reserve protocol basket component fails.

Governance Extractable Value (GEV)

A common problem faced by all decentralized stablecoins is the soundness of governance, which has given rise to a new term: Governance Extractable Value (DEV). In today’s DeFi system, managers can often achieve better returns by compromising the protocol, for example, by introducing questionable collateral types in search of short-term profits, or even blatantly malicious actions to steal user funds. Compared with traditional corporate governance supported by the legal system, DeFi is more risky because the governance of many DeFi projects is virtually anonymous.

A common GEV mitigation today is to add a time delay before governance measures take effect, in order to give users time to withdraw funds from the protocol before malicious changes occur. But in terms of protection, this is usually not enough for two reasons: first, many DeFi systems (such as Dai) have no mechanism for exiting liquidity, because Dai can only be redeemed by creating its vault. Second, the time delay is often very short, and users do not have the habit of frequently tracking the details of smart contracts, which leads to the fact that user funds are still not effectively protected.