Starting from the three major stablecoin mechanisms, in-depth discussion on the development of algorithmic stablecoins
As of October 4, 2021, the lock-up volume of the entire DeFi has reached 194 billion US dollars. Among the public chains, the lock-up volume applied on Ethereum is 133.46 billion US dollars, accounting for 68.8% of the entire DeFi, occupying absolute dominance As the underlying basic assets and intermediaries, stablecoins support the ecological development of the entire DeFi world. At present, the market value of stablecoins has reached 129.4 billion U.S. dollars, and the daily trading volume is 73.5 billion U.S. dollars.
Stablecoins can be divided into over-collateralized stablecoins (such as DAI), fully-collateralized stablecoins (such as USDT), partially-collateralized stablecoins (such as FRAX), and algorithmic stablecoins (unsecured, such as AMPL) according to whether they have collateral. According to their anchoring objects, they can be divided into fiat currency-anchored stablecoins (anchored to 1 US dollar), and non-fiat currency-anchored stablecoins (anchor targets will continue to change).
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OlympusDAO: Algorithmic Stablecoin with Strong Scalability
OlympusDAO is an alternative project among algorithmic stablecoins. In terms of mechanism, it is not linked to any target exchange rate or digital assets, but it has certain assets as support. The current supporting assets are mainly stable currency DAI and FRAX. The agreement stipulates that each OHM has 1 DAI or FRAX as its value In the future, it is expected that the supporting assets will continue to expand to other mainstream digital currencies to achieve diversification of reserves.
Olympus adopts a single currency system, and the stable currency is "OHM". The agreement uses the bond module and pledge module to issue stable currency and regulate market supply and demand, achieving rapid growth in scale. After the issuance of OHM in March this year, its circulating market value It has reached 2.1 billion U.S. dollars, occupying the first position in the algorithmic stable currency, but behind its huge market value is the sharp fluctuation of the token OHM price, but because most of its additional OHM has flowed into OHM holdings From the perspective of market value, Olympus has indeed achieved a steady and rapid growth in the value of the holder's assets.
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OHM Bond Module (Source: www.olympusdao.finance)
The conversion price of a bond follows the formula:
Among them, BCV is the bond control variable, which is controlled by the agreement. The execution price of bonds is inversely proportional to the amount of bonds issued, and proportional to the circulation of OHM. The smaller the circulation of OHM, the higher the discount for purchasing OHM, which encourages participants to purchase bonds.
Another core part of the project, the pledge module, plays a vital role in the operation of the entire system. The protocol provides more than 7000% APY to users who pledge OHM. The realization of such a high rate of return mainly relies on the compound interest investment every 8 hours (compound interest 3 times a day). Different from traditional income farming or pledge projects, all users who pledge OHM will get an equal number of sOHM tokens at the beginning, which can always be exchanged with OHM at a ratio of 1:1. During the pledge process, the system directly adjusts the user's sOHM In this way, participants can achieve compound interest reinvestment without having to harvest. On the other hand, the pledge income mainly comes from the agreement income on the bond side. For example, assuming that the current market price of OHM is $920, when the user purchases 1 OHM bond with 900DAI through the bond terminal, the agreement will issue 1 OHM to the applicant, because the agreement stipulates that 1 OHM only needs 1 DAI as the value Therefore, the agreement can issue another 899 OHM, and these 899 DAI actually constitute the profit of the agreement, 90% of which will be minted into new OHM as income and distributed to pledgers, and the remaining 10% will flow into DAO. According to this mechanism, it can be found that the higher the market price of OHM, the stronger the profit and issuance capacity of the agreement.
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OHM Price (Source; Coingecko)
In addition to the algorithmic stable currency, the project is also actively using the advantages of the project mechanism to expand. On September 30, the agreement officially launched the OlympusPro module. This is a service for token issuance utilizing the protocol's native bond module. Olympus will extract a 3.3% service fee from the issuance service to further increase the asset strength of the treasury. The first project to cooperate with it will be Pendle. The distribution of the entire token will last for 8 weeks. Users who deposit PENDLE/ETH LP tokens into the Olympus bond module will be able to obtain PENDLE tokens at a certain discounted price, which is expected to be distributed A total of 3 million PENDLEs. Compared with other IDO token issuance models, participants will not suffer impermanent losses. For token issuers, by recycling LP tokens, the fund pool can always maintain continuous liquidity and a stable scale, avoiding The liquidity of many IDO fund pools dried up shortly after the issuance.
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pOHM Token Distribution (Source: www.olympusdao.finance)
From the perspective of the entire mechanism of Olympus, when the price of OHM rises, the scale of the agreement will continue to expand, but once OHM starts to fall continuously and the pledge chips begin to loosen, the agreement may fall into a self-negative feedback loop: the price of OHM continues to fall, resulting in The ability of the agreement to increase issuance has weakened, OHM pledge income has decreased, market selling pressure has increased, and demand has decreased, further suppressing the price of OHM. In this case, the agreement treasury and the asset reserve of DAO will be the only force to save the whole system. The agreement may need to continuously increase the pledge income and reduce the selling pressure through the accumulated asset reserves and additional issuance capabilities in the process of continuous decline in the pledge capacity, thereby breaking the negative feedback loop.
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Assets held by Treasury and DAO (source: www.olympusdao.finance)
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RFV Asset Value (Source: www.olympusdao.finance)
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Agreement income (project party/ treasury income, source: Tokenterminal)
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Reflexer: One of the Most Stable Algorithmic Stablecoins
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Project financing (source: Crunchbase)
The agreement is a dual-token system, which adopts the over-collateralization model of ETH, and keeps the price stable through the behavior of arbitrageurs. In terms of mechanism, Reflexer is very similar to the stable currency DAI, but its stable currency RAI is not anchored to a fixed exchange rate or index, and its target price will continue to change during market fluctuations. The agreement sets the target price as the redemption price (Redemption Price), which is initially set to 3.14, which is also the price for users to mortgage ETH to the agreement to mint RAI or destroy RAI. The redemption rate is equivalent to the interest rate, according to the formula:
Redemption rate = Kp X (redemption price-RAI TWAP)
Among them, RAI TWAP is the time-weighted average price of RAI, which is calculated by using RAI/ETH (UniswapV2) and ETH/USD (from Chainlink) in the past 16 hours. The project party determines the value of the parameter Kp through a large amount of data backtesting and simulation testing. The changing target price is reflected in:
When the market price of RAI is higher than its target price (redemption price) at a certain moment, the redemption rate will be negative, so that the redemption price will gradually decrease. During this process, arbitrageurs can mortgage ETH to the system and mint RAI is then sold at a higher market price to obtain income. At the same time, due to the reduction in the amount of RAI destroyed to the system (the cost of destruction is higher), the supply and demand of RAI changes, thereby pushing the market price of RAI to the redemption price. , which is a continuous dynamic equilibrium process.
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System Mechanism (Source: Reflexer.finance)
The protocol uses the idea of a PID controller, a common feedback loop component in industrial control applications. By comparing the collected data with a reference value, and then using this difference to calculate a new input value, the purpose of this new input value is to make the data of the system reach or maintain the reference value. Different from other simple control operations, the PID controller can adjust the input value according to the historical data and the occurrence rate of the difference, which can make the system more accurate and stable.
The PID controller consists of a proportional item, an integral item, and a differential item. The proportional item considers the amount of deviation, the integral item considers the deviation time, and the differential item considers the speed of deviation growth or reduction. After a large number of simulation tests, the current project only considers the most The safe and simplest proportional item is used as the initial starting scheme of the project.
The protocol governance token is FLX, with an initial total of 1,000,000 pieces, which will be used for the governance of the protocol and to ensure the security of the system. Users pledge FLX/ETH LP tokens on Uniswap v2 to the agreement to obtain certain income, but it will act as a system protection role. Once the mortgage rate is insufficient, the agreement will auction LP tokens (up to 30% of the LP tokens in the pledge pool can be auctioned) to repurchase RAI to increase the mortgage rate. In addition, FLX is also the lender of last resort in the system. When the system is in crisis, the agreement will mint FLX for auction.
The project pursues minimal governance and has a clear roadmap:
1. Target date April 17, 2022, at this stage governance of liquidation, auction and tax mechanisms, and many other core contracts should be minimized. This means that only a few parameters in these contracts are controllable from now on.
2. Target date August 17th, 2022, all core contracts except oracles, savior contracts, and PID controllers should implement minimal governance based on edge cases found in production environments. This means that from this point in time, only a few system parameters should be governed. More importantly, at this stage, all remaining governance should be left to the community.
3. At this stage, the project party intends to allow the community to fully operate the project. The community should decide when, how, and if any remaining components can move further out of human control.
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RAI price and redemption price (Source: Dune Analytics)
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RAI Distribution (Source: Dune Analytics)
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RAI trading volume (Source: Dune Analytics)
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Float: The New Rising Algorithmic Stablecoin
Float is also an Ethereum-based illicit currency-anchored stablecoin. The stablecoin FLOAT initially set a target price of $1.618. The protocol adopts a dual-token system. The governance token BANK plays a key role in regulating the FLOAT price. When the target price is reached, BANK will absorb the excess premium or support the value of FLOAT.
The protocol only supports ETH as collateral. Before the initial issuance of FLOAT, users can use ETH to exchange for equivalent FLOAT. The protocol calls the collateral composed of ETH a basket. In the initial state, the total value of the basket is equal to the total value of the minted FLOAT. equal in value. Basket Factor is defined as the ratio of the basket value to the FLOAT value calculated based on the target price, which is an important reference index for systematic macro-control.
The agreement will monitor whether the time-weighted average price (TWAP) of FLOAT is equal to the target price every 24 hours. If not, the system will conduct an auction (Dutch style). During the auction, the price will gradually decrease (Dutch style) or gradually Elevated (anti-Dutch), relying on arbitrageurs to push prices closer to target prices. Each auction will last for 150 blocks. The project plans to increase the frequency of auctions in the future, gradually transitioning from every 24 hours to canceling the fixed auction time, and auctions will be organized by participants.
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Protocol Auction Mechanism
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Examples of Auction Asset Composition
The target price of the agreement is a constantly changing value (floating anchor), with an initial value of $1.618. When FLOAT TWAP is higher than the target price and the basket factor is greater than 1 or FLOAT TWAP is lower than the target price and the basket factor is less than 1, the target price will be adjusted according to the model. The project team used the model to backtest the trend of ETH (collateral) in 2020, and the results show that the overall target price will gradually rise with the rise of the market.
According to the protocol model formula:
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Backtesting based on market trends in 2020
The project governance token BANK also plays a key role in the agreement. When adjusting inflation, it is a premium absorber that absorbs the premium of FLOAT relative to the target price. When deflation occurs, BANK will play a role in supporting the price of FLOAT. Absorb the market's selling pressure on FLOAT. The initial total amount of BANK is 168,000, and inflation may be issued after one year. The current market value exceeds 24 million US dollars, which is much larger than the market value of the stable currency FLOAT.
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Summarize
Summarize
Algorithmic stablecoins, as a branch of stablecoins, are often considered to be a tree without roots. After Ampleforth, more and more algorithmic stablecoins began to try the model of partial mortgage or mixed collateral, and they really achieved token price stability. As a currency experiment, the non-fiat currency-anchored stablecoin actually entrusts the encryption people to get rid of the shackles of the traditional dollar and build a real cryptocurrency world. However, as far as the current development is concerned, there are the following problems in the non-fiat currency-anchored stable currency:
1 Based on traditional concepts, the transition of the unit of account in people’s lives and financial activities from the dollar system (or currency system) to the illegal currency system (floating) requires not only a conceptual change, but also great difficulty. This restricts the development of non-legal currency-anchored stablecoins.
2 At present, most fiat currency-anchored stablecoins can more or less realize the function of asset reserves (price stability or market value stability), but they have encountered difficulties in ecological expansion. For projects such as OHM, although the holder's asset value has achieved a steady increase, in terms of mechanism, this realization process is inseparable from the holder's speculation and pledge links, coupled with the large fluctuations in token prices and free circulation Due to the scarcity of quantity, it is not a good choice as a payment medium.
With the continuous development of DeFi, an algorithmic stablecoin whose market value can continue to grow to meet market demand, and at the same time achieve a relatively stable currency value and be independent of the fiat currency system will be the common pursuit of the crypto world. While the non-fiat currency-anchored stablecoin described in this article may seem like a distant experiment, and there are currently no clear success stories, it may be the best bet for the industry to break away from the shackles of the traditional US dollar.
