Explain in detail why algorithmic stable coins become unstable “bomb coins”


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Stable coins are hailed as the “jewel in the crown” of cryptocurrencies. In the Bitcoin white paper, Satoshi Nakamoto believes that Bitcoin is a peer-to-peer electronic cash system. However, due to the large price fluctuations of cryptocurrencies represented by Bitcoin, it is difficult to serve as a standard for measuring value in reality, and there is no currency. “Value scale” function. The stable currency solves this problem very well. It has the advantages of encrypted currency without borders, fast transfers, and transparent transactions, as well as relatively stable value. As the most widely used stable currency, USDT has exceeded 20 billion in circulation and replaced BTC as the medium of exchange between cryptocurrencies.

Stablecoins all have the function of elastic supply. According to the implementation method of elastic supply, the existing stablecoins can be divided into four categories.

1. Rebase class represented by Ampleforth

The decentralized exchanges in the Ethereum network mainly use ETH as the trading medium. In the v1 version of Uniswap, it is even mandatory that all ERC20 tokens can only establish trading pairs with ETH, and transactions between ERC20 tokens are based on ETH. As an intermediary, it is realized through routing. In the v2 version, although you can freely choose, it is still based on ETH, and the liquidity of AMPL in Uniswap is also on the AMPL-ETH trading pair. In this way, when the overall cryptocurrency falls, without the participation of external forces, AMPL will inevitably fall with the fall of ETH; of course, ETH can also drive AMPL to rise.

When the market falls, AMPL will inevitably encounter a sell-off, and as the price of AMPL is below $1, the value of AMPL held by the user will shrink due to the price drop, and the number of AMPL tokens in the hands of users will also decrease. Will expand the user’s panic, leading to further selling. When it falls, AMPL easily forms a death spiral; when it rises, it easily forms a spiral.

Therefore, in a bull market, AMPL usually performs better than other cryptocurrencies, but it also performs worse in a bear market, which is equivalent to a market amplifier. In July 2020, the number of AMPL issuance increased by 57 times, and the market value increased by 23 times when the price fell 58%.

2. Pledge lock-up class represented by Empty Set Dollar


The price stability of ESD is also based on an elastic supply model. When the ESD price is higher than $1 and the agreement needs to increase the supply, new ESD tokens will be minted, and these tokens will be distributed to the pledgers; if there are outstanding debts in the system at this time, these debts will be paid first . When the price of ESD drops, users can choose to destroy ESD to buy bonds at a preferential price. If the price is again higher than $1, the bond can redeem ESD 1:1. If the bonds are not redeemed within 30 days after the bond is purchased (the price is less than $1), these bonds will be destroyed and all the assets corresponding to the purchased bonds will be lost.

3. Multi-tokens represented by Basis Cash

4. Part of the algorithmic stablecoin represented by Frax


As expected, after the launch, due to the popularity of algorithmic stablecoins and the scarcity of FXS, the mortgage rate will continue to decrease, and the price of FXS will continue to rise. In the actual process, it did not meet expectations, and there are some points worth thinking about.

Even so, FRAX’s minting volume exceeded 20 million U.S. dollars within one hour. However, due to the FRAX-ETH trading pair, Frax went online soon after the ETH fell, causing FRAX to passively fall to less than one U.S. dollar, and the mortgage rate gradually rose to 100%, insufficient FXS consumption.

Although there is a price stabilization mechanism in the project, part of the cost will be deducted by the system during minting and redemption. Therefore, when the price of FRAX is less than $1, arbitrageurs are not willing to buy back FRAX from the market due to the high cost. Burn FRAX to redeem USDC.

Since the price of FRAX is lower than US$1, FXS cannot be used well. Not long after the launch, Frax entered a situation similar to a death spiral. Until FRAX returns to the state of requiring 100% USDC collateral, FXS will increase from 20% in a short period of time. The multi-dollar fell to $5. Fortunately, the project has already received high attention before it goes live. The rise of ETH and the support of other projects have brought the price of FRAX back to more than $1. Now the supply of FRAX has reached 76 million, and the mortgage rate has dropped to 88.75%, which means that 11.25% of FXS is consumed to cast FRAX, and the price of FXS has returned to $7.

to sum up