Stablecoin is the holy grail in the crypto field, and it is the crypto track that has the opportunity to keep pace with Bitcoin and Ethereum in the future. This is destined to have a steady stream of projects involved in order to realize the ultimate encrypted stable currency dream.
Stablecoin iteration: risks and opportunities
The first generation of stable currency experiments was to tokenize legal currency, for example, to tokenize USD, which gave birth to a series of USD stable currencies such as USDT. The first-generation stable currency is an important bridge between fiat currency and cryptocurrency.
The second-generation stablecoin experiment was originally intended to build a decentralized stablecoin, but with the evolution of MakerDAO, the early ETH collateral was too volatile, which may lead to liquidation, and the liquidation caused the price to continue to fall, and the price fell further Lead to more liquidation, which has a knock-on effect. After the black swan incident on March 12 this year, in response to market risks, MakerDAO introduced some centralized assets as collateral, such as USDC, wBTC, etc. For stability, MakerDAO made certain trade-offs in terms of decentralization.
The third-generation stable currency test is a crypto-native stable currency, such as the flexible stable currency test of AMPL and YAM. These stablecoins do not need to use collateral, and are mainly regulated by algorithms and mechanisms. For AMPL and YAM, please refer to the previous articles "AMPL: Alternative Scarcity" and "YAM: A New Variation of AMPL".
The fourth-generation stablecoin experiment is a cryptographically native algorithm stablecoin experiment, such as ESD and BASIS. They refer to the previous design of the prestigious Basecoin, and combine the experience of liquid mining and flexible stablecoins to design a new stablecoin mechanism.
It should be noted that the first and second generation stablecoins have been widely adopted, while the third and fourth generation stablecoins are still in the experimental stage and there are many uncertainties. However, this is the direction of exploration for stablecoins in the future. This uncertainty itself is extremely risky, but also an opportunity.
Today's Blue Fox Note mainly talks about ESD, one of the duo of algorithmic stablecoins. The algorithmic stablecoin design originated from basecoin (for details, please refer to the previous article "Thinking about the stable currency Basis" by Blue Fox Notes). However, due to pressure, the basecoin project did not continue. If it was able to continue at the beginning, it may now have a chance to shine.
ESD inherits the design idea of basecoin, realizes the adjustment of circulation supply through incentive measures, without collateral (USDT and MAKERDAO require collateral), but it also borrows from the popular model of DeFi today, such as no token pre-mining, liquidity mining These new trends in mine and DAO governance. In addition, in terms of composability, it is easier to integrate with other DeFi protocols than AMPL and YAM.
ESD stabilization mechanism
ESD is decentralized, but the biggest problem facing decentralization is: how to ensure its stability?
The first importance of stablecoins is stability, not decentralization. If stability and decentralization have both, of course it is better, but it is not easy to achieve. So far, there is no stablecoin that has really successfully achieved this. Whether it is DAI, AMPL, YAM, or ESD, BASIS, they are still on the way, and they have not really achieved this goal. But on this road, there is a steady stream of exploration in the encryption field.
USDT and USDC are tokenizations of USD. They need to mortgage USD and trust custodians. They are stable but not decentralized. DAI currently has an overall market value of more than 1.1 billion U.S. dollars, which is the closest to decentralization among stablecoins with a market value of more than 1 billion U.S. dollars. However, there are many centralized assets (USDC and wBTC, etc.) in its collateral, which makes it unsatisfactory. The ultimate vision of the encryption field. In addition, DAI and sUSD need to be over-collateralized, and the solvency of their collateral needs to be guaranteed. Once there is a risk of market fluctuations, their stability will also be affected. This is also reflected in the 3.12 Black Swan Incident in 2020.
AMPL uses a new elastic adjustment mechanism called rebase (re-adjustment of supply). If the price of a coin is higher than the target price, additional tokens will be issued and automatically distributed to the token holders, which will cause the price of the coin to fall through inflation; and if the price of a coin is lower than the target price, the coin will be reduced and the coin will be changed. To be scarce, so as to increase the token price and make it tend to the target price. AMPL re-adjusts its supply every twenty-four hours. Through this flexible mechanism, the price is close to the target price.
Unlike AMPL and YAM, ESD's token adjustment is not a global adjustment through smart contracts, and ESD's token supply adjustment is done on the initiative of users. What stimulates user behavior is the ESD incentive mechanism.
This incentive mechanism is the key to ESD being different from other stablecoins. When the price is higher than the anchor price (1USDC), users can choose to pledge their ESD to have a chance to get more newly issued ESD rewards. As ESD increases, ESD circulation is increased, thereby reducing ESD prices. When the price is lower than the anchor price, the ESD agreement issues debt and token holders can buy it. ESD will issue coupons, and ESD holders can obtain coupons by destroying ESD.
Why are users willing to buy coupons? This is because there are discounts for purchasing coupons. When the future ESD price is higher than the target price (1USDC), more ESD can be redeemed with coupons. When the amount of ESD agreement debt is greater, the amount of ESD that users can redeem is greater because the original discount is greater. As debt increases, discounts increase, which will encourage token holders to burn more ESDs and buy coupons, thereby reducing the supply of tokens and increasing the price of tokens.
Under this mechanism, ESD will encourage arbitrageurs to make arbitrage. Users have the opportunity to get more ESD by pledge their ESD or purchase coupons. Staking ESD can passively gain income, while purchasing coupons can gain income through arbitrage. Of course, buying coupons is also risky and not suitable for everyone.
It should be noted that: the current Coupon has set a validity period, and the coupon will expire after 90 epochs, which is equivalent to 30 days. This is a risk of it, so ordinary users must be cautious when buying Coupon. If they fail to complete the exchange within the validity period, it will cause losses. Coupon is more suitable for professional players.
The advantage of this mechanism is that it can reduce user panic to a certain extent, and it is not easy to produce a death spiral. In the rebase mechanism of AMPL and YAM, when the price of the coin is lower than the anchor price, people will have greater psychological panic. The number of coins is decreasing, and the price is also falling, which will cause some users to sell, which will further cause the price to fall, and the number of tokens in the wallet will further decrease. Of course, from the point of view of practice so far, AMPL and YAM have resisted the death spiral to some extent. In ESD, the tokens in the wallet of the holders of coins will not decrease, so there will be no visual and psychological impact caused by the decrease in the number of tokens in the wallet.
ESD oracle
The price predictor of ESD comes from Uniswap's liquidity pool USDC/ESD. In essence, ESD is also a synthetic asset, similar to DAI and sUSD.
ESD has an Epoch (epoch) every 8 hours. When the epoch changes, the ESD smart contract will learn the ESD price through the oracle. ESD uses Uniswap's TWAP (Time-weighted avaerage Price). For TWAP, you can refer to the previous article "Uniswap V2: What will Uniswap in the future look like" by Blue Fox Notes. It is the weighted average price of the past 8 hours, so it is difficult to manipulate the price of its oracle. The current TWAP price is 1.2286USDC, which will trigger additional issuance.
ESD can be integrated
Among the current stablecoins, USDT, USDC, and DAI all have ERC-20 standard tokens, and it is easier for developers to integrate them into their protocols. However, AMPL and YAM are not easy to be integrated because of the automatic adjustment mechanism of tokens. ESD does not directly change the number of tokens in the user's wallet, but stimulates the user's response through additional issuance or coupons, thereby adjusting the supply, and is also easy to integrate into the DeFi protocol.
Distribution of additional ESD issuance
The new issue of ESD must first repay the debt to satisfy the redemption of the Coupon. Coupon holders can redeem their ESD on a first-come, first-served basis. After completing the ESD coupon redemption, more new ESDs will be generated.
Then, after the coupon redemption is completed, who will the new ESD be sent to?
First, the users who pledge ESD in the DAO will receive 80% of the newly issued tokens, and the remaining 20% will be allocated to those users who provide liquidity for ESD/USDC on Uniswap.
The liquidity provider pledges LP tokens from its Uniswap token pool to ESD. Currently, in order to unlock a user's LP token, it is necessary to wait for 5 epochs, which means that it can withdraw its liquidity after 40 hours. Participating in the DAO pledge ESD will also be locked. At present, it takes 15 epochs to withdraw from the DAO pledge, which is 5 days. The design of this unlocking period will reduce the market circulation of instant ESD. This will help expand the overall market value of ESD in the early stage, increase the rate of return, and increase the attractiveness of the agreement. Although, this is not the original meaning of stable currency.