Algorithm The algorithmic stable currency in the fourth quarter of 2020 is on fire, and the slogan of the post-defi era was once called out. According to the analysis algorithm, the stable currency relies on the algorithm at the time of design to ensure the stability of the currency price. Its existence is like a social experiment.
Recently, the eighteenth issue of Catcher Academy hosted by Chain Catcher invited xy from xy studio to share the theme of “Understanding the logic and potential of algorithmic stablecoins from 0 to 1”.
Question: Algorithmic stable currency is a hot topic recently. Why is it popular? Can you tell us about the operating mechanism of algorithmic stable currency?
xy: The popularity of the algorithm currency should start from the amplifier. It is this well-known “split disk” that has brought a steady stream of heat and traffic to the concept of the Rebase algorithm. Only when the algorithm currency will flourish in the fourth quarter of 2020.
Regarding the operating mechanism, the algorithmic stablecoin uses a regular rebase mechanism to keep its currency price at its anchor price (currently mostly US dollars). If the currency price is greater than its anchor target, it will use an active inflation mechanism (positive Rebase, directional additional issuance of currency rights, etc.) to fill the premium. If the currency price is less than its anchor price, it will use active deflation mechanisms (negative rebase, selling coupons, etc.) to provide momentum for the currency price to restore anchor pricing.
Question: Many people thought that “algorithmic stablecoins are a false proposition”, which are unstable and have no long-term value. What do you think of this statement?
xy: I personally do not agree with this rude view. If it is only for the pure rebase algorithm stable currency during the amplifier-dominant period, then this view is tenable.
Although the pure rebase amplifier stabilizes the currency price at the anchor price, its rebase soaring and slumping currency volume only brings opportunities for speculation and gambling to retail investors. Due to the daily rebase of the currency volume, it does not exist as an ecosystem. The premise of financing assets.
And the team seems to sit back and watch the situation, so there is no problem in questioning them from the motivation. But the algorithmic stablecoin has developed to the present, I think it has appeared valuable projects, and can already see that there are products that can compete with the industry’s largest on-chain stablecoin issuance program. In terms of issuance methods and plans, rebase obviously brings more liquidity to the method of mortgage asset issuance.
Question: Some people think that algorithmic stablecoins are “split disks”. In your opinion, what is the essence of algorithmic stablecoins?
xy: First of all, the term “splitting disk” refers to pure rebase coins headed by Ampl, as is the baseprotocol, which was extremely popular in November.
However, I think that the second phase of algorithmic stablecoins led by esd and basis has moved away from the scope of only providing split volatility disks. They have made theoretically-supported improvements based on the rebase of amplifiers, such as directing the positive rebase of inflationary issuance to lock dao, LP bond or equity currency holders, and improving the negative rebase of deflation and production into coupons and selling ( Burning token), bond exchange (similar to coupons mechanism) ecological option bonds, etc.
All these have made the “algorithmic stablecoin” change from a “split disk” with no ecology at all to a native “chain stablecoin” with a foundation for construction.
At the same time, the rebase is directed to equity and bonds, so that the “algorithmic stable currency” has the possibility of ecological expansion, that is, it becomes a financing asset with a constant volume and price on the user side.
Q: What do you think of the current competitive landscape of algorithmic stablecoins and the skyrocketing of ESD, BASIS, FRAX and other projects?
xy: I try to summarize from what I can see, but still keep my distance, because the market is changing so much, I still hope everyone can think for themselves.
In terms of market value scale, esd>basis>frax; in terms of the simplicity of the token economic model, frax>esd>basis; in terms of the volatility seen in the mechanism setting, I think it is basis>esd>frax.
The community types and economic mechanisms behind the rise and fall of these projects are not the same. The rise and fall are the views of currency speculation. In general, it is the inflow of hot money for the new concept track.
However, if it can survive after rushing in, it means that the project ecology has an opportunity. This opportunity may be an opportunity for construction or speculation, but it all shows the vitality of the project.
Question: From which dimensions will you analyze whether you want to invest in an algorithmic stablecoin project? Can you review the process of your successful Nuggets algorithmic stablecoin project?
xy: There is no difference between the dimension of analyzing algorithmic stable coins and the dimension of analyzing general projects. It can be divided into three aspects: First, whether the project economic model is logically self-consistent; Second, whether the basic improvement for rebase is based on real needs; Third, fundamental information (team, development, chip distribution, etc.)
I don’t have the experience of digging a project from the beginning, but after getting hot, I get income by studying its economic model and chip distribution investment.
For example, in the early stage of the last round of expansion of esd, after finding that only a few thousandths of its circulation pool was needed to raise the currency price above the water, I bought some 45% premium coupons. For me, This is an investment with a high probability of return.
Q: In which dimensions can the current algorithmic stablecoin project be innovative?
xy: I may be more conservative about innovation. From a project perspective, Frax’s plan is currently my most promising. This plan should have a few more to race, I suggest that everyone pay less attention to innovation, and more attention to ecological development. If only some pseudo-demand innovation like brainstorming, it will only bring stupid money ponzi. Of course, this is good news for gamblers who like to flush dishes.
Question: As a pioneer of the three-currency separation, BASIS has brought many opportunities to newcomers, but there are still loopholes in the model. What aspects of these needs to be improved include?
xy: Basis has not yet entered a period of ecological development. If you want to challenge its model, you have to wait for it to complete a complete round of water/underwater operations.
But in terms of economic mechanism, basis provides the most flexible mechanism among these projects. For example: the separate currencyization of stocks and bonds, as well as the indefinite period of bonds and the violent algorithm of bac/bab. In terms of high volatility and elasticity, it is indeed the most complete.
Question: The speculative nature of algorithmic stablecoins is inevitable. Will it always be subject to extreme expansion and contraction cycles? Why?
xy: Since there is no daily limit / limit down mechanism, it should be said that the speculative nature of projects in the development period is inevitable.
I don’t think that algorithmic stablecoins will always be subject to such an unhealthy cycle. For example, Frax transfers the long and irregular periods of expansion and contraction to the market value of its equity tokens. Moreover, in my personal opinion, esd has also entered a relatively stable cycle, and it is now more likely to encounter a ceiling problem.
Question: The cost of investors entering the field of stablecoin mining is very low, and it is also an investment method with high returns in the current market. At the same time, what risks will they face? What are the good strategies and suggestions?
xy: Since its data is on the chain, the risks faced by investors are more clear than other projects. Therefore, when investing in such projects wisely, there are more clear opportunities. The suggestion is to watch more and less move, and then go on after you understand.
I have given an example of the investment strategy above. Once you understand its operating mechanism, you can at least guarantee that you will not lose money. It will be better to talk about making money on the basis of not losing money.
Secondly, it is easier for people with good mathematics to play algorithmic stablecoins, and a lot of money can be calculated using formulas.
Question: Algorithmic stablecoins are still in the early stages of development. What development trend will there be in the future? How do you view the finality of algorithmic stablecoins?
xy: “Bold prediction”, next year there will be 1-2 projects with more than 10e dollars and recognized by mainstream defi. What we currently see, for example, esd will be listed as a trading pair on curve, these are proofs of ecological development.
The emergence of algorithmic stable currency projects will fundamentally change the current situation where the original stable currency financing asset makerdao dominates the chain.
