Malt Malt – Algorithmic Stable Coins That Demonstrate Possibilities in Fairness and Capital Efficiency
Last year saw the emergence of a series of algorithmic stablecoins that are either pegged to some notional value (e.g. ESD, FEI pegged to $1) or not pegged to a notional value but relatively stable (e.g. RAI and OHM).
Last year saw the emergence of a series of algorithmic stablecoins that are either tied to some notional value (e.g. ESD, FEI tied to $1) or not tied to a notional value but relatively stable (e.g. RAI and OHM).
However, all projects share a common goal – to provide a decentralized stablecoin with extreme capital efficiency.
They use algorithmic mechanisms to achieve this goal, rather than the collateralized mechanisms used by established projects like DAI.
In 2021, there should be a full-fledged algorithmic stablecoin project running anyway, yet we see a large number of algorithmic stablecoins actually failing.
Optimistically though, there are still new iterations of algorithmic stablecoins being attempted all the time, and while it may not always succeed in the future, it shows us a possibility. Take for example Malt (Malt).
Malt tokens can be effectively pegged to any value, which greatly improves capital efficiency.
Some time ago Malt made an error in liquidity mining, which resulted in LP tokens being locked in the contract. They have now emptied the liquidity pool and are about to go live with a more mature V2.
So how does Malt make stablecoins profitable for holders while maintaining stability and fairness with extreme capital efficiency?
Fair Issuance – Improving Initial Stability
The vast majority of assets in the crypto world are issued, often inequitably. For example, institutional investment as well as private pre-sales have explicit or implicit thresholds, which are in fact no different from traditional entrepreneurship in this respect.
While this approach is effective in reducing risk for developers, it transfers risk (and the potential benefits that come packaged away at the same time) to a privileged few, rather than to the project’s adherents and real users.
That is, the privileged few earn revenue at the expense of the project’s true backers, resulting in a disproportionate investment versus return.
Malt is an emerging algorithmic stablecoin project that allows users to earn revenue by providing popularity when the price is above the anchor value, while users can participate in arbitrage auctions to earn revenue when the price is below the anchor value.
Malt’s offering, on the other hand, is simple. First the team provides a small amount of liquidity (enough to reduce slippage on the initial purchase) and then it is left to the protocol (providing liquidity, casting Malt, etc.).
No one has the privilege of investing first in this process, and the risk of a smash is avoided (the counter-example is that there are DeFi projects that turn on liquidity mining, and investors will mine with a large number of tokens obtained at very low cost, and end up smashing the board and walking away).
So Malt’s offering is more fair and will further influence investors’ decision making behavior – initial users will act in favor of buying tokens rather than selling them, which will make the price deviation more stable.
All in all, a fair offering has two distinct advantages.
Firstly, it is more in line with the decentralized spirit of DeFi, and secondly, it will steer initial investment behavior towards purchases, thus making the protocol more stable once it goes live.
Diverse liquidity – bringing greater stability
Malt has two main ways of profiting: providing liquidity and arbitrage auctions.
Users providing liquidity to the Malt pool on AMM will be rewarded with liquidity, and when the price remains stable is to receive a fixed annualized rate of interest (APY) on Malt.
Initially there will be only a Malt/DAI pool where all LP rewards will be paid in DAI. In the future there will be other pools (e.g. Malt/ETH) where rewards will be paid in ETH.
Therefore, Malt holders will be able to choose their own tokens for payment, adding liquidity to high demand pairs. malt holders will also not sell their positions, as all the proceeds will come from another token (DAI).
It is worth noting here that most stable coins pay out rewards in native tokens, but this is not conducive to speculators liquidating (many steps and potential losses), but this is not a problem with DAI.
And future liquidity incentives can be paid in “other” tokens, which naturally brings more liquidity to Malt, which in turn brings more stability.
Arbitrage Auctions – Cross-Time Arbitrage
Most algorithmic stablecoins maintain price stability through arbitrage mechanisms. The ideal is to be able to react quickly to regulate the price return when the price of the stablecoin is above (or below) the anchor price.
Early algorithmic stablecoin projects were regulated by changing the money supply, but this had a problem –
Newly minted tokens do not have immediate access to the market, so prices do not react instantly. And because the price is still off, further tokens are minted. By the time these tokens hit the market, they will again cause a sell-off, sending the price below the anchor price again.
Like many stablecoins, Malt also minted new tokens when the price was above the anchor price.
The difference, however, is that Malt sells the newly minted supply directly to the market (the amount minted is the amount needed to return the price to the anchor price at the time of sale), which means that Malt is more responsive to price fluctuations.
When Malt’s price falls below the anchor price, it triggers the creation of an “arbitrage auction” that lasts 30 minutes – a Dutch-style auction that starts at about $1 and steadily declines over the 30 minutes.
The auction ends as soon as the time is up or a predetermined amount of money is pledged to the auction (the pledged funds are always in the “Other” tokens in the Malt/Other pool).
In return for the pledged funds, the auction participants receive arbitrage tokens (each arbitrage token is converted into “Other” tokens for the equivalent value of $1).
Although the arbitrage auction takes time (up to 30 minutes), the response time is already relatively fast and at least eliminates the possibility of negative loops as much as possible.
Liquidity Expansion (LE) – enabling flexible supply
It is not only the users who participate in arbitrage auctions, but also Malt’s reserve system.
Liquidity Extension (LE) is a concept developed by Malt to maintain a stable reserve system.
Specifically, 20% of all new profits are set aside as reserves, and then it is decided whether and how to add to the AMM pool based on actual needs, thus serving as a price stabilizer.
In other words, the agreement sets a minimum reserve ratio of 20%, and this reserve (or LE) can then be used to balance prices by participating in arbitrage auctions.
Specifically, for every arbitrage token purchased by an arbitrage auction participant, a corresponding additional LE is also released (which means that it pushes up the auction price faster). The total amount of arbitrageurs and LE is then used to purchase Malt tokens directly from the AMM liquidity pool, which is eventually destroyed, resulting in a reduction in supply.
The Liquidity Expansion (LE) mechanism brings many advantages to the stability of the protocol.
The most important is the optimization on the elastic supply mechanism – the supply shrinks even without the participation of market participants in the auction (many algorithmic stablecoins end up crashing due to the extreme dependence of stability on market participants and consequently encounter regulation failures).
FEI and Malt
To better understand the emerging Malt, we can start by comparing it with the more familiar FEI.
All those who follow the algorithmic stablecoin space should be aware of how much of a stir FEI caused when it was introduced – it was the most well-funded DeFi project ever, raising over $1 billion in its initial offering.
FEI and Malt have many similarities, but the differences are explored more here, as well as the possible advantages of Malt.
Above the anchor price
Whenever the market price of FEI is higher than the anchor price, it creates an arbitrage opportunity – anyone can mint new tokens and sell them at a higher price, which brings the price back down.
And while the Malt protocol also minted new tokens and sold them, the arbitrage profits were allocated to the liquidity provider.
Malt’s mechanism is theoretically fairer because FEI’s mechanism favors bots, while Mal is allocated to any liquidity provider.
Below the anchor price
FEI is balancing the price differential through the funding rate and levying a higher rate from the seller than subsidizing the return to the buyer, thus creating further supply deflation.
The problem is that this approximation of a tax penalty affects normal trading behavior and does not build good relationships with users.
Malt’s mechanism is more market-based, incentivizing buyers through a dynamic premium determined outside of AMM, thus achieving meaningful supply deflation without imposing a tax penalty on any seller.
There is no doubt that FEI offers an innovative solution as an excellent algorithmic stablecoin project, but Malt is also unique in its own way.
Malt’s TVL grew well beyond expectations in the 24 hours after V1 went live – with a TVL of $60.69 million. However, due to bugs (such as rewards disappearing) and quickly going offline, the updated V2 is believed to be going live soon.
Malt, while not necessarily successful in the future, shows us a possibility –
with design mechanisms that are as fair as possible, as well as significantly more capital efficient.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/malt-malt-algorithmic-stable-coins-that-demonstrate-possibilities-in-fairness-and-capital-efficiency/
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