DeFi’s new play: an article about the new algorithmic stable coin Malt

Over the past year, a number of new algorithmic stablecoins have emerged. Most of these projects either anchor their tokens to some real value, such as $1 (e.g. ESD and, more recently, FEI), or are unpegged but relatively stable, such as RAI and OHM.

DeFi's new play: an article about the new algorithmic stable coin Malt

Over the past year, a number of new algorithmic stablecoins have emerged. Most of these projects either anchor their tokens to some real value, such as $1 (e.g. ESD, and more recently FEI), or are unpegged but relatively stable, such as RAI and OHM. the goal of these projects is to provide a decentralized stablecoin that is capital efficient.

They attempt to achieve this through protocol mechanisms rather than collateral guarantees from established value projects, as is the case with DAI.

This type of algorithmic stabilization is called “algorithmic stablecoin” and many projects have emerged in this space recently, but most have failed. We’ll discuss this in a separate article in the coming days.

For now, let’s start by exploring a promising solution to the algorithmic stablecoin dilemma, Malt, a creative new project that innovates on an existing concept to effectively peg to any capital-efficient token of value (for simplicity’s sake, let’s start with $1). More information on how the Malt algorithm achieves stability will be released in the coming days. But a common question of interest is, “How do I profit from a stable coin?” This is a question that must be stated clearly. Because if the project is to survive, it needs a sustainable solution.

Not all algorithmic stablecoins benefit their holders in the same way, but there are two main ways that malts can be profitable:

  1. Tied LP

Grow LP tokens from a Malt + “Other” AMM pool (e.g. Malt / DAI LP pool) and then get rewarded with “Other” tokens whenever Malt exceeds the peg. While the price remains stable, LPs receive a fixed APY in Malt.

  1. Arbitrage Auctions

When the price drops below the exchange rate, the “Other” token is pledged for the arbitrage auction, thus providing a reward to the owner or paying a premium in “Other” tokens.

DeFi's new play: an article about the new algorithmic stable coin Malt

Malt Mechanism Overview

To facilitate this, malt has a protocol-controlled value transformation method that we call “liquidity extension”. The details of how this works will be announced in the coming days. But let’s discuss the basis of how malt works for end users.

Bonding LP

DeFi's new play: an article about the new algorithmic stable coin Malt

Malt LP bonding process

Users who provide liquidity to the malt pool on AMM will be able to pledge their LP tokens in order to receive the rewards for providing liquidity. Initially, we will set up a single Malt/DAI pool, which means that all LP rewards will be paid in DAI. In the future, there will be other pools like Malt/ETH, which pays out rewards in ETH. This will allow malt holders to choose the tokens paid to them, stimulating high demand for pairings and thus increasing liquidity. Malt loyal holders would also have no incentive to sell their positions, as all the profits would be in another token.

An additional benefit is that any rewards are not locked in. Users can withdraw or reinvest their rewards as soon as they see them in their account. (If you are a limited partner in the first week, you may get some extras as well, but don’t tell anyone yet.)

Unlike other programs that include rewards tied to DAOs (such as DSD and ESD), Malt focuses on incentivizing LP providers because the high level of liquidity directly increases the stability of the exchange rate. Thus, the rewards for limited partners are to safely grow the stack of any other token offered on the platform.

These rewards for limited partners come in two forms: (1) limited partners are rewarded when the price is above the exchange rate, and (2) limited partners are rewarded when the price is set at around $1 for an extended period of time.

When the price is above the exchange rate, the agreement generates new malt that is sold to the liquidity pool. The profits from the sale are distributed to the limited partners who provided the guarantee and to the liquidity pool (see separate article for details). When the price enters a stabilization period, the agreement does not need to produce new malt to stabilize itself; the agreement will issue a fixed APY to all tied limited partners, payable in malt. This APY is set through governance.

Arbitrage Auction
Malt arbitrage auction process

When the price of an algorithmically stabilized coin is higher than the exchange rate, bringing it down is easy and usually takes the form of minting and distributing new tokens, as in the case of Malt. However, the more significant challenge is how to bring the low exchange rate back up. malt solves this problem with a variety of mechanisms (which will be detailed in a subsequent article), one of which is a Dutch auction using arbitrage tokens (arb tokens).

The auction of arb tokens lasts 30 minutes or until a pre-specified amount is raised. The price of the arbitrage token starts at $1 and continues to fall for 30 minutes until the price of the target token is raised.

The protocol then automatically redeems Arb tokens for the user, with each token having an equivalent value of $1. This provides a lucrative premium for users who purchase Arb tokens for less than $1. This Dutch auction ends when sufficient funds are available, allowing the market to determine the premium for arbitrage tokens while largely encouraging investors to buy.

Arbitrage auctions are conducted on a per-pool basis, which means that MALT/DAI pool auctions are completely segregated from the MALT/USDC pool. All bids are done in the non-local token pool, so for the initial start-up pool, DAI will be bid to receive a premium in the MALT/DAI pool.

When the auction is completed, the Arb token will be automatically and immediately redeemed in the pool’s non-local token for a value of $1. Automatic redemption eliminates the effect of bots and gas fees that manipulate the protocol. All bids will be used to purchase MALTs and destroyed. However, it is worth noting that this auction process is only one part of achieving exchange rate stability. It is combined with mechanisms for other malts to push the price back to normal exchange rate levels. This system is complex and requires a separate article to explain.

For now, investors should know that participating in arbitrage trade auctions gives them the opportunity to buy future dollars at a premium, similar to a bond. But there is one distinct difference from a bond, and that is that it never has a maturity. It will pay off in the earliest possible opportunity without the need to hold it for the long term.

Specifically, how Malt can achieve this in a sustainable and reliable manner without the continued growth of token supply will be covered in detail in the next articles. This is because these relate to the relevant algorithms that provide functionality for arbitrage auctions and liquidity scaling for Malt.

This article only provides a general introduction to the potential users of Malt: liquidity pool rewards and arbitrage auction premiums. The essence of the spirit of Malt is to achieve easy participation and reliable profits. Based on the complex formula behind it, Malt will provide users with an optimal choice in the ever-growing stablecoin market.

We welcome your attention to our future articles, which will follow with a deeper dive into the mechanism by which Malt remains stable. With the upcoming launch of the project, we will also be releasing how-to articles and videos on how to participate in LP pools and arbitrage auctions.

DeFi's new play: an article about the new algorithmic stable coin Malt

Malting is the hardest work, but it’s also the most down-to-earth work

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