Interpretation of algorithmic stablecoins

Original author: BlockArk

At 4 pm on December 31, 2020, BlockArk Chief Analyst Mo Ke conducted a year-end sharing live broadcast of "Interpretation of Algorithmic Stablecoins" in the Uniswap Chinese community. The content of the live broadcast is summarized as follows:

1. What is algorithmic stablecoin?

There are two types of stablecoins

Collateralized stablecoins: centralized USDT/decentralized DAI

Algorithmic stablecoins Based on algorithms/consensus, AMPL, ESD, BASIS, FRAX

The algorithmic stablecoin AMPL became popular during the DEFI boom in July this year.

After the DEFI craze passed, ESD became popular in November, followed by Basis in December.

In fact, the logic of these algorithmic stablecoins is similar.

Basically, it revolves around the anchored price of 1USD, using tools such as additional issuance, deflation, bonds, dividends, etc. to solve the problem of anchoring 1.

If AMPL is greater than 1, it will be issued to coin holders. If it is less than 1, all coin holders will be deflated.

If ESD is greater than 1, additional issuance will be given to coin holders and LPs. If it is less than 1, bond repurchase will be used to reduce traffic, and the next additional issuance will be given to bond holders first.

If Basis is greater than 1, additional bonds will be issued to shareholders. If Basis is less than 1, bonds will be repurchased to reduce the circulation and the next additional issuance will be given to bondholders first.

We will analyze the deeper logic later. Let’s first use Mith as a sample (not a buying recommendation) to demonstrate to you how to play with algorithmic stablecoins.

Usually, we refer to 1 pool as a pool where stablecoins or single currencies can be used for free. These pools usually generate Cash (theoretically anchored to 1U).

Pool 2 is for LP (liquidity market makers in decentralized exchanges, which are subject to the risk of impermanent loss. Simply put, it means being dumped when making markets). In mith, we can see that MIC-USDT produces MIS, and MIS-USDT produces MIS (I personally like to call this pool 3).

2/3 pools usually have a high annualized return. Yesterday, the daily return of the mic-usdt pool reached 600%, but the risk is that if someone keeps dumping MIC and MIS, you will lose money. This is the famous 2-pool trap.

This is the first way to make money, the 1/2/3 pool.

The second way to make money is to pledge BAS, share shares, and get dividends during inflation.

This is what people who play basis refer to as dividends every day. The profit point is to use BAS to lock up and get BAC, and the risk point is the price of BAS plummeting.

Way 3 to make money is to buy bonds when the BAC (cash) price is less than $1, and wait for it to be greater than $1 to be exchanged for cash, which is equivalent to buying cash at a discount. The risk is that the cash price will not rise back to $1.

Using Solidus as an example, you can see that the bond price is very cheap, but the project is almost dead, the SOC (cash) price can’t go back to where it was, and people who bought the bonds will suffer losses.

Sorry, several projects are mixed together because different projects are at different stages of functionality. For better demonstration, basically all such projects have three coins: cash (anchored 1), share, and bond.

Then we usually need to use APY tools for this kind of mining, and the commonly used one is this one:

https://vfat.tools/

There are two projects with more sophisticated tools

http://bc.tools/

https://esd.tools/

After looking at the APY, you will naturally know whether it is suitable for you. However, the annualization of Pool 2 is not very meaningful. The main thing for Pool 2 is whether the price can be stabilized. If it is stabilized and there is no major selling pressure, you can get on board only when the positive cycle consensus is re-established.

2. The essence of algorithmic stablecoins

In essence, algorithmic stablecoin is not a stablecoin, but a ZJP using this name.

However, because this concept is so powerful, we see Basis is so strong, but it does not mean that imitations will always be strong. Although there are many Basis imitations now, it is recommended that you treat them with caution or be prepared to lose money.

I said something in an article I wrote before, which is the best summary of the ZJP model.

So I really want to pour cold water on everyone and tell them to think carefully before buying a copycat disk.

Refer to YFI YFII and the subsequent mining.

Refer to sushi, and the mining after sushi.

In the end, only the master disk and other very innovative projects will survive.

As for the discussion about the Federal Reserve in the group, just listen to it. You just need to figure out one question.

Who will really use AMPL, ESD and BAC as a payment tool or a store of value?

Of course, as an algorithmic stablecoin of ZJP, it also has the greatest potential for making money. Is there any project that can surpass fomo and ponzi?

3. Comparison of algorithmic stablecoin competitors

The new and more common algorithmic stablecoins are now divided into three categories:

Because ESD (DSD) requires staking LP and single currency, and has an unlocking time limit, its circulation is smaller and more stable, and it was once ridiculed as a stablecoin.

Basis (a series of imitation disks) is actually more unstable than ESD, but I personally think that the expansion and contraction caused by this instability will make its growth exceed ESD. I shared this view in the middle of the month, but Basis has not been verified underwater (below 1U).

Frax (with pledge attribute) has a stronger pledge attribute. Compared with Basis, it is more like a Basis-like transformation of DAI/MKR. This project is more stable than Basis because of the existence of pledge. But unfortunately, there is no dividend, so no positive cycle is formed, and there is no fomo in the short term. But in fact, there is a more circuitous repurchase and destruction mechanism. And because there was a private placement before, it is not a fair launch, so many people dare not enter the market.

4. Let us explain why Pool 2 is so dangerous.

This is the so-called APY trap. Why do you lose money even if you make tens of thousands of times a year? 36,500% annualized, 100% daily, 4% hourly. It looks very high, but in fact, as long as it drops by 4% every hour, all your profits will be eaten up. That is to say, no matter how high your profit is, it will not drop as fast as your principal. If the principal drops, no matter how high the profit rate is, the profit will not be high.

Take a math test.

There are 100BAC+100USDT in the AMM pool, and the unit price is 1USDT. If all 100 BACs are produced and sold at a low price, what will the price be?

The correct answer is 0.25U. If you don't understand, you can look up what "constant product" means.

Therefore, anyone with common sense would not have taken over MIC yesterday if they had calculated MITH's daily MIC emission, even if the annualized rate of MIC-USDT was very high.

ESD and Basis have already started this trend. Basis has achieved a return of nearly 10x in the past 20 days. This get-rich-quick effect will attract more players, so this section must continue to be watched.

It is a pity that although I have been optimistic about the Basis project for a long time, I have not waited until the right time to enter the market, and missed a lot of profits. And because of the risk of Pool 2, I will not force you to buy the project, but share it more. After all, it is too difficult to grasp the degree of human fomo.

Let's simply organize the projects in Basis mode. There should be no major code problems (I am not responsible for this sentence if there are any problems)

https://basis.cash/ The price of BAS dropped from 500 to 100 and then returned to nearly 1000. Recently, there has been a bit of excessive fomo. If you have just seen my sharing, I would not recommend you to enter the market, but you can keep observing. Let me add one more point, why I personally prefer Basis. Because Basis's dual-currency mechanism cuts volatility and is more suitable for listing on exchanges. For me personally, I will still wait for opportunities to enter the market underwater because I hate losses.

There is a very interesting time point for this project. When the first wave of the crash occurred, Huang Licheng bought in crazily under his real name and survived the first wave of crisis. This also proves how important consensus is for an algorithmic stablecoin. The second wave of consensus was the purchase of 3AC addresses, which gave everyone confidence.

https://basisdollar.fi/ The first copycat platform is suspected to be made by the 5th Uncle team. It uses Value as an exchange, which brings trouble to its own buying. Most new investors still use Uniswap, and forcing its own exchange brings trouble to itself.

http://solidus.cash/ The copycat of Binance Chain has failed to get off the ground.

https://mith.cash/ Huang Licheng's imitation disk, there are 1 billion funds in mining, small funds 1 pool can't pull. If the price drops very low, you can consider buying it, after all, Huang Licheng and others' disks have been so rushed.

https://bdollar.fi/banks Binance copycat, more than 1 million funds locked, mini-market, not studied in depth.

https://basiscoin.finance/ It is more like a copycat of Basis, with a pool cap of 20,000 U to prevent large users. The improvement is that the boardroom (dividend pool) uses LP. I personally think it is not a particularly strong improvement, but the popularity is okay.

https://onecash.finance/ There are a lot of pre-mining, and there is no 1 pool to give people 0, so I skipped the first death test. It seems that people with pyramid schemes and plates play this more, and the community structure is not quite the same. I personally dislike pre-mining, so I didn’t participate, but this one may last longer than Huang’s. There is also a maximum adjustment coefficient of 1.1, so cash will not change a lot at once.

In addition, the first death test for many projects is the dumping of stablecoins by those who have 0% of their money. If they cannot withstand this wave of dumping, the project will basically be doomed. Solidus is the most typical example. Although I personally don’t like the approach of OneCash, it at least solves the first death test.

I basically don't look at ESD models anymore. The team is said to be designing a new solution, so I haven't followed it in detail. As for Frax, it hasn't exploded yet due to the problem of model design. I recommended it to you at 3.5U earlier, and no one should lose money. The highest price in recent days is close to 8U. There are more projects. If I see them, I will share them with you, or you are welcome to share them with me.

https://bihu.com/article/1450792780

You can read this article about impermanent loss and read it carefully. If you don’t understand this, you can’t play DeFi.

Okay, my sharing ends here. If you have any questions, please raise them and we can discuss.

【Free Q&A Session】

@楚休红Frax: I wanted to lock it for 14 days, but ended up locking it for 140 days... I locked myself out

Mo Ke: I don’t know when Frax will explode, just like I didn’t know Basis would explode so quickly. I knew 20 days ago that this project would definitely be popular, but I had no idea it would explode so quickly. I don’t know when Frax will explode, but I personally think it’s good, and I will probably increase my position under 4U. Also, if you lock Frax with FXS/FRAX, remember not to lock it for too long, as it may be locked to zero.

@Jesse: Thank you for sharing! Could the 3ac address be the project owner? Does the project owner still need to be the banker or wild banker to help such projects survive the initial crisis?

Mo Ke: No, that address has been monitored by someone, that is, the 3ac address. But people with this kind of address also know that they are being monitored, so whether they are playing an open card or a counter-routine requires specific analysis.

@ Zhang Jie: Is it generally possible to consider entering this type of stablecoin project when it is underwater?

Mo Ke: No, I usually only consider buying when the mother disk is underwater and taking a gamble. It is also possible that the price will go down to zero. At that time, I will decide based on the cost performance.

@Walker: Mo Ke, what do you think about the future of algorithmic stablecoins? Is it possible that the funding game will replace USDT/USDC and mortgage stability?

Mo Ke: I am not optimistic about pure algorithmic stablecoins. It is too difficult to establish consensus. That is why we say that we have to watch it underwater, which is the same as BTC. The current consensus of BTC is established after countless crashes and rises. Only by slapping others in the face can you brainwash others. Algorithmic stablecoins have not yet undergone large-scale underwater verification. From a personal perspective, I think it is more difficult. After all, countries dare not issue currency based on pure consensus. They still have to have the strongest power in the world - physical transcendence, to maintain the consensus on the circulation of currency. What do algorithmic stablecoins rely on? Purely rely on consensus? I think it is too difficult.

*Note: This article is for research discussion and information sharing only and is not intended as investment advice.