The three are compared in terms of anchoring methods, stability mechanisms, risks and trade-offs.
Written by: Float Protocol
Introduction
We have been asked many times how Float Protocol compares to other new generation stablecoins. At present, the most common comparison is with RAI (Reflexer Labs) and FEI (Fei Protocol), and the two names of RAI and FEI are named after the history of “stone coins” on the ancient Yap Island.
We want to take a moment to briefly explain the differences between each other. The comparison is divided into three parts, the first is the anchoring method, the second is the stability mechanism, and the last is the risk and trade-offs.
Anchoring method
Let’s start with the issue of anchoring. The anchor price refers to the anchor point where each stablecoin agreement hopes to return the market price to maintain stability.
Fei Protocol
FEI is anchored at $1.00. The advantage is that users are very familiar with the concept of stablecoins: stablecoins are worth $1.
Due to its peg to the U.S. dollar, FEI suffered similar problems as other crypto stablecoins. First of all, from a symbolic point of view, the U.S. dollar is the currency of a very traditional financial system, and cryptocurrency is trying to innovate this system. Secondly, because the U.S. dollar is such an important financial asset, crypto stablecoins anchored to $1 are facing increasing regulatory scrutiny (see here ). Third, the US dollar stable currency must be centered on the United States . For people in other parts of the world where the U.S. dollar does not dominate, this may not be very attractive. The fourth and most important point is the expansion of the U.S. dollar and loose monetary policy (the famous Internet celebrity “printing machine, go!” Money Printer Go Brr ridiculed the US federal government’s behavior of over-issued currency to prevent economic recession. ) Constantly eroding the U.S. dollar. This means that if the purchasing power of the U.S. dollar declines, the purchasing power of the U.S. dollar anchored stablecoin holders will also decline (even if the cryptocurrency is rising).
credit to Dan Held!
Reflexer
Contrary to FEI, RAI is a non-anchored stablecoin. RAI’s starting “redemption price” (which they call the target price) is $3.14 (i.e. Pi, determined by a Twitter vote).
The redemption price is inversely correlated with RAI demand (decreases as RAI demand increases), and is positively correlated with ETH leverage demand (that is, it should be roughly positively correlated with ETH price). In short, if there is a large demand for RAI as a currency and store of value, then the price of RAI will fall. If there is a great demand for ETH leverage, then the price of RAI will rise. This statement is too simplistic, but it does point out the two main factors driving RAI’s long-term price.
In addition, according to the parameters of the “PID controller” used by Reflexer (this only represents the feedback loop mechanism used by Reflexer to control prices), RAI should have a certain degree of volatility in the short term, but it should be quite stable in the long term. It should also be able to largely ignore the price changes of the underlying collateral (currently only ETH). In a preliminary test of ProtoRAI , the price of ETH rose by 350%, while the redemption price of PRAI fluctuated less than 4% .
Float Protocol
And Reflexer Similarly, FLOAT is unanchored stable currency. The starting price of FLOAT is $1.618 (the golden section in mathematics). Contrary to RAI, the target price of FLOAT is positively correlated with the increase in FLOAT demand, and like RAI, it is positively correlated with the price of ETH.
Compared with RAI, FLOAT will remain stable in the short term (because the on-demand auction mechanism is very effective in correcting market prices), but in the long term, its value will change more. Specifically, FLOAT will be more sensitive to changes in the price of its collateral (only ETH in V1) . We deliberately designed FLOAT in this way to protect users’ long-term purchasing power. This means that its value should be more aggressive than RAI, but it can maintain smoothness and low volatility.
However, since there is no free lunch in the world, this does mean that under the circumstances that the price of cryptocurrency continues to fall and the demand for stablecoins (especially FLOAT) continues to be insufficient, the target price of FLOAT will follow the price of its collateral. , With less volatility and a slow decline
Stabilization mechanism
Next, let’s look at the stabilization mechanism, that is, how the agreement returns the market value to the target price.
Fei Protocol
Fei is a partial mortgage system, and its initial mortgage is ETH. The collateral is not “owned by the user”. Instead, they coined a term called PCV (Protocol Control Value) . This means that users cannot directly arbitrage collateral from the system. Instead, the system actively manages the collateral to control the anchor (the anchor price in the FEI agreement is $1).
The operating mechanism of the system starts with a certain percentage of collateral (depending on the number of FEI minted during the first sale) supporting the system. Then, the system uses all the collateral (ETH) to add liquidity to the ETH / FEI fund pool in the Uniswap agreement (the fund pool does not require any collateral to mint other FEI).
Expansion of Fei <br>If the price of FEI exceeds $1, the agreement allows users to mint new FEI directly from the system (in exchange for an equivalent amount of ETH as collateral). For example, if the market price of FEI is $1.50, anyone can mint a new FEI at $1.01 and sell it on the market until the arbitrage opportunity is closed.
Fei’s contraction <br>If there is insufficient demand for FEI and the price drops below $1, the system has two main price correction methods:
The first is called “direct incentives.” If the price is lower than the anchor exchange rate, the basic method is to fine the seller. This fine is implemented to encourage buyers to purchase FEI. In essence, these direct incentives are similar to bonds in that they stimulate speculators to support their prices when they fall below the anchor price.
If the direct incentive measures cannot completely correct the price, the second price correction mechanism will be activated. These mechanisms are called “anchor reweighting”. In this case, the agreement will withdraw liquidity from the Uniswap fund pool. The withdrawn ETH collateral will be used to buy FEI on the open market and return it to the anchor price. The remaining ETH will flow back into the Uniswap fund pool. The end result should be that the price returns to the pegged exchange rate, even though the collateral in the agreement is now reduced.
Reflexer
Reflexer is an over-collateralized debt system. It is essentially a fork of MakerDao’s multi-collateral DAI, except that Reflexer replaced the stabilization fee with a modified redemption price (the target price in the RAI system) to allow negative interest rates, which in turn allowed the target price of RAI to change over time.
Expansion of Reflexer <br>If there is too much demand for RAI and the market price is higher than the redemption price, the system will further reduce the redemption price. It means that someone can mint a new RAI at the redemption price, and then sell it in exchange for ETH, and get rich returns.
Reflexer’s contraction <br>If the demand for RAI is insufficient and the market price is lower than the redemption price, the system will further increase the redemption price, resulting in higher borrowing costs. This incentivizes people to repay their loans in order to reduce the supply of RAI in the market, which should increase the price of RAI under all the same conditions.
Float Protocol
Float is a dual-token partial mortgage system. Float uses collateral (just ETH in V1) and stores it in what we call a “basket”. Similar to FEI, users cannot directly arbitrage collateral from the basket. The Float agreement uses “baskets” to conduct Dutch auctions (the bidding price of the auction objects decreases from high to low until the first bidder hits the hammer when the price reaches or exceeds the reserve price), so that the price returns to the target price. One of the main goals of the system is to ensure that there is always a target amount of collateral corresponding to the FLOAT target price, which we call the “basket factor” (initially 100%).
Expansion of Float <br>If the price of FLOAT is higher than the target price, any user can start the auction (initially, the auction can only start after holding for at least 24 hours, but the requirement will be lowered, and then as participants operate the system The way became more satisfying and was completely cancelled).
Once the auction is started, the system casts and sells a new FLOAT, starting at the market price + part of the premium (in most cases, unpopular transactions), and then gradually reducing the offer price to gradually approach the target price.
At every step where there is an active arbitrage opportunity (the price in the auction is lower than the market price), the arbitrageur will buy FLOAT from the agreement and sell it on the market for a small profit. When purchasing FLOAT from the agreement, the arbitrageur pays the fee in a mixture of ETH and BANK (the second token in the Float system).
For example, suppose the target price is US$2, the market price is US$4, and the basket coefficient is 200%. Assume a step in the auction to give a price of $3.90 (so there is an obvious opportunity for arbitrage of $0.10). Of the 3.90 US dollars, 2 US dollars will be paid in ETH, and 1.90 US dollars will be paid in BANK. The BANK paid to the Float agreement will be permanently burned by the agreement. In this way, the Float protocol will deposit “extra volatility” into BANK tokens. If the basket coefficient is lower than 100%, BANK can be actively used in contraction. We can also see that after expansion, the basket coefficient will decrease and gradually move towards the target.
Contraction of FLOAT <br>If the market price of FLOAT tokens is lower than its target price, the agreement will purchase FLOAT from the market in the form of a “reverse Dutch auction”. In a “reverse Dutch auction”, the seller (in this case the Float agreement) will tell the buyer in incremental steps how the bid is acceptable.
The first quotation is the market price minus some discounts. The agreement will gradually increase the quotation until the price target price is reached. If the basket coefficient is lower than 100% (that is, the value of the collateral in the system is lower than the circulating value of FLOAT), the agreement will buy FLOAT from the market, and the mixed assets used include the ETH in the basket and the newly minted BANK. This is the exact opposite of what happens during expansion. In this case, the cost of “backfilling” the basket coefficient is borne by the BANK holders. The FLOAT purchased by the agreement was immediately burned.
The cool thing about the Float agreement is that the process of contraction always increases the basket coefficient (the relationship between the collateral owned by the agreement and the amount of FLOAT in the market). This is because in the contraction state, FLOAT is repurchased from the market at a price lower than its target price.
( Note that in the v1 version, when the price is lower than the target anchor price, there are few incentives for speculators to participate in the transaction. However, we plan to add a bond-like system in future versions. Similarly, in order to protect purchasing power and price fluctuations To strike a balance, we plan to introduce an interest-based system to increase/decrease the demand for FLOAT in a more granular way. )
Risks and trade-offs
Finally, look at the shortcomings of each of the above agreements, and the compromises and concessions made to achieve their goals.
Fei Protocol
One of Fei’s risks is the negative spiral effect caused by the sharp drop in the price of its collateral . This is an inevitable risk, because it tries to defend the fixed 1 dollar pegged exchange rate backed by floating collateral. If the price of its collateral falls sufficiently, the long-term ability of the system to maintain a pegged exchange rate may be questioned and a “bank run” may be triggered.
In this case, as we have seen when using unsecured stablecoins, speculators who support prices will soon disappear (meaning that direct incentives are not enough to fix the anchor exchange rate). In addition, the system will need to protect the anchoring through its “anchor weighting”. However, due to the fact that impermanent loss and weighting actually use collateral to support open market prices, a negative feedback loop may occur. Selling collateral to support the price means that there is not much collateral to support the price in the future, which leads to a lack of confidence in users, which weakens the price and causes more collateral to be sold. This situation may continue until a complete death spiral is formed.
One of the measures Fei mentioned to break this death spiral is (system management token) TRIBE can be used to remortgage the system. However, this requires decisions such as emergency voting to be effective. If it is necessary to use this measure, the question will be whether the agreement can be restored due to fears of recurrence. Regardless of these, the positive aspect of Fei is that it is more capital efficient than over-collateralized stablecoins and more powerful than the first generation of purely algorithmic stablecoins.
Reflexer
Given that Reflexer is based on multi-collateral DAI, it has the advantage of having undergone actual tests in the 2018-2019 bear market. This means that the risk of the black swan is very small (although this is true for any over-collateralized system). Due to the way the oracle works, the price in the system is slightly delayed, so there is a little oracle risk . In theory, its price may fall rapidly, and loans that should have been marked for liquidation will not be marked correctly. The result will be that users have some time to rescue their collateral, resulting in insufficient collateral in the system.
A trade-off made by RAI is that the capital efficiency of the system is lower than that of a partially mortgaged stablecoin system. An oddity of the RAI system is that if the demand for RAI greatly exceeds the price increase of ETH, then the long-term dollar price of RAI will tend to fall. This is because if there is too much demand for RAI, the redemption price (RAI’s target price) will move downward. From a practical point of view, this may reduce the purchasing power of holders.
Another noteworthy risk is that the PID controller on the chain is very complicated, and it may be difficult to find a suitable balance to maintain the stability of the system. Reflexer provides a good overview of PID risks here.
Float Protocol
Similar to FEI, one of the main risks of FLOAT is a “bank run” caused by the decline in the value of collateral. In this case, if the ETH price drops a lot, the Float protocol will adjust by slowly lowering the target price over time (the speed depends on the market price relative to the target price). The contraction will be paid for by the basket supported by BANK.
Interestingly, a large and sudden sale of FLOAT would actually be beneficial to the agreement. It will allow the agreement to quickly increase its basket coefficient. Because in each contraction auction, the agreement ultimately has a higher percentage of the basket coefficient (because the agreement buys FLOAT from the market at a price lower than the target price of 100% mortgage support, leaving excess collateral in the basket , If there is a contraction in the future, it can support the remaining FLOAT in circulation).
However, the risk of FLOAT is that if the price trend shrinks severely enough for a long enough period of time, liquidity and speculative demand for BANK may disappear. This means that it will be difficult for the Float agreement to fully return the price to the target exchange rate (the collateral in the final agreement in the basket or the newly created BANK is not enough to support the FLOAT price). Instead, the Float protocol will rely on fluctuations in the target price to absorb all pressure over time. Unlike Fei, Float will still work as designed, but the target price will fall more than the ideal rate.
An outstanding feature of the Float design is that as the agreement gets more use, BANK has higher stability and market acceptance, and the basket coefficient can be voted down to less than 100% (through governance). This will make the agreement more efficient in funding and approach a truly independent digital currency.
Allocation and start method
As mentioned in the previous remarks, this article does not discuss the distribution and launch methods of tokens (especially the difference between the venture capital VC investment model and the [fair launch] method adopted by FLOAT). You can read this article or the summary below.
Summary:
The financing model through VC is the main signal of project quality and provides a powerful promotion effect. However, this tends to centralize the project in the early stages, away from its core user base (this may be a good thing, but it is not always the case). We carried out a “popular start” and distributed a significant portion of BANK governance tokens to active governance participants in other platforms. We do this by setting up a deposit limit of $30,000 and a whitelist. So far, the result is that there are about 4,000 addresses buying BANK or farming proceeds.
to sum up
Overall, we have tried to investigate the differences between each method. Importantly, the system design may not be perfect. Real-world experience will reveal everything we need to know, and the team that is most adaptable and capable of iterating products will succeed, perhaps by learning from each other.
We sincerely believe that the compromise of diversity is definitely a good thing for the evolution of stablecoins. DeFi needs its own sense of stability and has nothing to do with TradFi. We believe that current and future development will achieve this goal.
For more information about each of the above protocols, see:
Float documentation -> https://docs-float.gitbook.io/docs/ Reflexer documentation -> https://docs.reflexer.finance/ Fei documentation -> https://docs.fei.money/
Float Protocol social media information website — https://www.floatprotocol.com/ and also available via: https://ipfs.io/ipns/floatprotocol.eth/#/stake
Documentation — https://docs-float.gitbook.io/docs/
Twitter — https://twitter.com/FloatProtocol
Telegram — https://t.me/officialfloatprotocol
Medium — https://medium.com/@floatprotocol
Github — https://github.com/FloatProtocol/
Discord — https://discord.gg/nVCZacJJqM
Scattershot (fork of Snapshot) — https://scattershot.page/#/snapshot.floatprotocol.eth
Forum — https://forum.floatprotocol.com
