Algorithmic stablecoin: seeking change while maintaining stability

The market and community’s pursuit of “ideal” algorithmic stablecoins continues.

AMPL was pushed to the forefront again due to Aave’s proposal.

On July 4, AMPL broke through US$1.042 and entered the issuance phase. Previously, since May 13, 2021, AMPL has been in a state of deflation for a long time. During this time, the supply of AMPL has shrunk from 498 million to 182 million, and its market value has fallen from $413 million to $171 million.

Subsequently, on July 20, the Aave community initiated the AIP 12 proposal, proposing to support the algorithmic stable currency AMPL. AMPL once again drove algorithmic stablecoins to attract market attention. Soon, the proposal was passed, and AMPL became the first rebase asset on the lending platform.

On the 27th, AMPL once again staged the “instability” of the algorithmic stable currency, and completed a nearly crazy skyrocket within a day.

Algorithmic stablecoin: seeking change while maintaining stability

(Data source: coinmarketcap)

AMPL is adjusting

Affected by the news that AAVE supports AMPL lending, the short-term supply and demand of AMPL in the market has changed significantly. The currency price rose rapidly from 1.1 U when the proposal was passed to around 2.3 U, and the impact of the news was immediate. In addition to price growth, based on a 24-hour weighted price to calculate a positive Rabase single inflation of 6%, AMPL holders’ short-term income growth at that time was extremely fast.

The leading decentralized lending platform Aave has always been cautious about the choice of supported assets. Although it is not yet possible to mortgage AMPL to borrow other assets, the community still generally believes that this is an important development of AMPL.

According to the rules, AMPL will inflate when it is higher than 1 US dollar and deflate when the price is lower than 1 US dollar, which will amplify market volatility to some extent. Due to the particularity of Rebase, the AMPL lending method is also different from general currencies. If you borrow AMPL in Aave, Rebase will not occur. Borrowers need to pay 48% annualized interest to enjoy inflation benefits. This approach makes the borrower’s risk relatively controllable, and also allows AMPL to be used as a relatively stable asset.

However, in this way, the highest borrowing rate on Aave is limited to less than 48% (0.13% per day). And AMPL’s daily Rebase can reach 7% or even higher. For lenders, equity may be out of balance: when AMPL is higher than $1, AMPL’s asset utilization is always close to 100%. In this way, depositors can neither obtain inflation gains nor redeem their own assets, and the annualized return on deposits of AMPL on the Aave platform is 38.4%.

At present, Brandon, the founder of Eye-catching, is proposing dynamic adjustments to interest rates on Aave, and is seeking AMPL’s variable interest rates to make up for the losses of depositors through interest and to rebalance the incentives between borrowers and lenders.

According to current official information, the new model intends to use 75% as the best asset utilization rate. At this time, the annualized interest paid by the lender is 2%. When the asset utilization rate rises to 100%, the annualized interest rate of the loan will be as high as 10002%. The new model can use interest to make up for the loss of depositors and rebalance the incentives between borrowers and lenders.

It seems that AMPL still needs time to verify itself.

AMPL’s new move has brought the already silent algorithmic stablecoin section to renewed attention. There is a view that in recent months, various countries and regions have gradually tightened the supervision of stablecoins. This point of time may be an excellent time for the development of purely algorithmic and highly decentralized stablecoins, and it will be in the market. Under unstable conditions, the advantages of algorithmic stablecoins are shown.

Regulators in the United States and other regions are paying more attention to stablecoins. Fed Chairman Powell has stated repeatedly in public channels that stable currency supervision needs to be introduced as soon as possible. It has publicly stated that the current stablecoin lacks a clear regulatory framework and that stablecoins should be regulated in a manner similar to bank deposits and money market funds.

The systematic role of stablecoins in cryptocurrency trading and lending has caused regulators and investors to pay attention to the risks from supervision.

At the same time, since last year’s AMPL “bring fire” algorithmic stablecoin section, innovative algorithmic stablecoins have been launched on the market one after another. The ideal algorithmic stablecoin concept attracts long-term investment from developers and investors. Although the algorithm logic has been updated and iterated, very few can survive, and the market’s pursuit of “ideal” algorithmic stablecoins has never stopped.

Algorithmic stablecoin: try and break

Looking back at the current algorithmic stable currency market, we can see many new changes and trends.

The first generation algorithmic stable currency AMPL is a typical single currency system. After AMPL, algorithmic stablecoins represented by ESD soon appeared, and the game model of bonds was introduced to transfer volatility to bonds. Without departing from the single currency model, the algorithm and anchor assets of the stable currency have been adjusted, and it has entered the stage of “simulating the Federal Reserve’s issuance of bonds.”

The emergence of Basis allowed the community to enter the “multi-currency model” of algorithmic stable currency. Basis imitated the system of modern central bank regulation of the basic money supply and issued three categories: Basis Cash (BAC), Basis Bond (BAB) and Basis Share (BAS) Token, these three types of tokens correspond to U.S. dollars, bonds, and stocks, which increase the richness of the system. Compared with the first-generation algorithmic stablecoin, the multi-currency model aims to increase the stability of the system. This design was once highly recognized by the community. However, Basis has fallen all the way since its launch in January this year. The current price has fallen to $0.08, which is far from achieving the goal of algorithm stability. The community has questioned the model relationship between the three currencies.

Frax is known as a new generation of algorithmic stablecoins. The model began to “simulate the central bank” approach. Similar to Basis Cash, Frax proposed three tokens, namely FRAX (stable currency), Frax Shares (stocks) and Frax Bonds (bonds). However, to mint a FRAX token, users must deposit Frax Shares (FXS ) And other collateral (USDC or USDT), a total value of 1 U.S. dollar.

Algorithmic stablecoin: seeking change while maintaining stability

(Data source: coinmarketcap)

It can be seen that this model introduces some mortgage assets, and the algorithm dynamically adjusts the details of the model to improve the stability of the entire system. According to the Q2 DeFi industry report released by TokenInsight, UST and FRAX have the lowest volatility, with an average deviation of less than 0.2%.

In the market, the problems of algorithmic stablecoins have also been revealed. ESD and BAC were anchored at $1, but they were completely separated from the anchor in the second quarter; AMPL, which has been linked to exchange rates, became one of the mainstream algorithmic stablecoins. The most volatile. The more optimistic phenomenon is that the price of FRAX has been stable at 1 US dollar for a long time. The arbitrage mechanism has effectively helped FRAX achieve price anchoring, and there are very few positive and negative premiums of more than 1%.

So far, the algorithmic stable currency project is based on the mortgage model of digital currency, and various innovations have been made around the mortgage rate, from 0 mortgage ESD, to dynamic mortgage FRAX, and subsequent over-collateral FEI. These attempts balance between mortgage rate and risk, but it is difficult to balance.

In addition, the newer stablecoins FLOAT and RAI did not choose to anchor the dollar. The former starts from the golden ratio of 1.618, and the latter starts from the pi (π), which is also regarded as a currency with low volatility. This also shows that there may be new opportunities for non-dollar stablecoins, and algorithmic stablecoins are still in the trial and exploration stage.

How the algorithmic stablecoin balances and competes in the “market size” and “price stability” is the biggest concern of the market and the community for algorithmic stablecoins. Since the development of algorithmic stablecoins, the ideas of various projects have become more conservative. What the market and the community need more is the “stability” of algorithmic stablecoins. In any case, in the three major sectors of “lending, mortgage, and stablecoin”, DeFi has shown great charm in the first two sectors. The development of the stablecoin sector is still regarded as a huge space. “Stable currency” still has too much expectations.


Posted by:CoinYuppie,Reprinted with attribution to:
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