How will these new Algorithmic Stablecoins and Stableassets fare?

How will these new Algorithmic Stablecoins and

Contrast this with Reflexer’s RAI, which is overcollateralized and is less prone to black-swan events. There is a minimum collateralization requirement but no maximum. Indeed, one could argue that Reflexer has a strong likelihood for success since it is a fork of Maker’s Multi-Collateral Dai and managed to retain its peg after Black Thursday (despite the length of time it took).

Furthermore, RAI does not confine itself to a fixed peg, thus giving it greater flexibility.

II. Trader Incentives/Disincentives

Algorithmic stablecoins and stableassets are designed to influence market behavior to help maintain its peg price. Older generations focused on rewarding “correct” user behavior (i.e., arbitrageurs).

This still carries on for newer algorithmic stablecoins and stableassets where all three possess similar minting reward mechanics when the price is above the peg. There is, however, a noticeable difference in approach during the deflationary phase.

Newer protocols are incorporating “negative reinforcement” tactics.

Fei penalizes sellers with a trading tax whenever FEI is sold below the peg. Reflexer indirectly raises the borrowing rate through the peg raise, which encourages borrowers to repay their loans (similar to Maker). Float is slightly different as it lets users’ battle’ it out in their reverse Dutch Auction. Rather than penalizing or rewarding users, Float lets market forces decide.

III. Emergency Powers

Perhaps the most interesting development is the push for stronger protocol powers. Each protocol’s system design has built-in functions to protect its market when its native asset significantly devalues. One could draw parallels to traditional finance where regulators or centralized financial authorities step in during financial crises.

Fei essentially cuts off access to liquidity by removing their PCV- backed liquidity from Uniswap pools - similar to how a country

might impose limits on bank withdrawals. Fei will then sell off its assets and offer to buy back excess FEI from the market. Float executes a similar tactic, except purchases are financed from the Basket. Reflexer halts all borrowings and only allows repayment of loans.

Associated Risks

We cannot emphasize enough that algorithmic stablecoins are still very much in the experimental phase. Protocols are still trying to figure out how to launch successfully without massive price swings.

Many algorithmic stablecoins protocols are also heavily reliant on competent arbitrageurs to maintain the price peg. If you are unsure how the protocol works, you would be at a severe disadvantage if you try to compete with savvy arbitrageurs (or even bots).

Algorithmic stablecoins require a strong community that believes in the project’s fundamentals. More often than not, short-term profiteers will leverage their capital reserves to control and manipulate the price. In a decentralized market, only a cooperative community with strong underlying mechanisms can overcome this dilemma.

In other words, you would need to commit significant time and resources to understand each project. Only then can you decide whether it can compete with the many alternative stablecoins/stableassets that already have an established market presence.

Notable Mentions

● Empty Set Dollar v2 (ESD)

ESD is migrating towards a dual-token stablecoin model by introducing a new token, ESDS. ESD v2 (also known as Continuous ESD) will be quite similar to Frax in having a partially collateralized stablecoin by incorporating a bank reserve backed by USDC.

Together with ESDS, these two new features will hopefully help mitigate the volatility of ESD tokens.

● Dynamic Set Dollar v2 (DSD)

While most stablecoin protocols are focussed on a partial or fully collateralized model, DSD (a fork of ESD) believes that this detracts from the ethos of decentralization. Despite its initial failure, DSD has updated its model by introducing a new token, CDSD, which is partially redeemable 1:1 for DSD tokens. The idea is to transfer the volatility of DSD tokens onto CDSD - similar to Frax’s model, but without any collateral.

● Gyroscope (GYR)

Gyroscope’s mechanics is an amalgamation of multiple algorithmic stablecoin protocols with its own twist. GYR is over-collateralized and backed by multiple assets split into individual vaults (similar to Maker). Like most algorithmic stablecoins, there are arbitrage mechanics but with the addition of a complementary leveraged loan mechanism. During times of crisis, users will get a more favorable redemption rate the longer they wait to pay back their loans.

● TerraUSD (UST)

Similar to DSD v2, UST is an uncollateralized dual token model (along with LUNA) and fully relies on arbitrage to maintain its $1 peg. At the time of writing, UST is one of the only successful algorithmic stablecoins to maintain a stable price peg - likely due to strong demand and a flourishing ecosystem (Terra) that incorporates the mining network into its price stability mechanisms.

Conclusion

Algorithmic stablecoins are effectively DeFi’s take on replacing a central bank, while algorithmic stableassets are DeFi's way to emulate the Gold Standard and create reliable digital collateral. In traditional finance, a

successful monetary system requires a competent and independent financial authority. In DeFi, competency is sourced from pseudo-anonymous individuals who are incentivized to collaborate and act rationally.

Successful algorithmic stablecoins and stableassets require longer time- frames to prove themselves, especially during times of crisis. Neither short- term incentives nor short-term speculation is sustainable in and of itself - they need to become more than just a thought experiment and offer economic utility through widespread adoption. It will be interesting to monitor how the algorithmic stablecoins and stableassets in this chapter will perform over the coming years.

CHAPTER 7: DECENTRALIZED DERIVATIVES

The acceptance of digital assets have progressed into the creation of sophisticated financial products for users and traders. Currently, the usage of crypto derivatives are more commonplace at the centralized platforms like Binance Futures, Deribit, FTX, and Bybit.

With the growth of decentralized derivatives platforms, traders can now trade crypto derivatives in a trustless manner too. In this chapter, we will be going through decentralized derivatives in three distinct sections -

Dalam dokumen How to DeFi: Advanced (Halaman 113-118)

How will these new Algorithmic Stablecoins and Stableassets fare?