Algorithmic Stablecoins: Is it sustainable or a risky gamble?

What is an Algorithmic Stablecoin?

Cryptocurrency as we know was designed to be a much more efficient and decentralized solution to our traditional fiat money but to achieve that this new form of currency should have stability over its value. Fortunately, this is where stablecoin enters the picture as due to its peg to a form of the physical asset, it comes as the closest form to money. These pegs are obviously varied across stablecoin creating a different forms of stablecoin such as fiat money, commodities, or even other cryptocurrencies itself but essentially they were all meant to achieve stability of traditional fiat money combined with the decentralized technology of the blockchain system.

Source: https://blazetrends.com/flashback-this-happened-this-week-with-terra-luna-and-ust/
  1. Rebase Model: The Rebase system was the first attempt at an algorithmic stablecoins and is used by various stablecoins like Ampleforth (AMPL). It operates on the basis of automatically adjusting the supply of the coin based on the current market price. If the price of AMPL goes higher than $1.05, more tokens are included in the supply, however, when it goes down to $0.95 coins are destroyed from the supply. This automatic supply adjustment is done to every holder proportionally irrespective of where it is stored and should be effective enough in keeping the price stable. Of course as we can see from the graph of AMPL this is not the case as it mimics the chart of the volatile utility coins due to its continuous adjustments instead of a stablecoin.
  2. Seignorage Supply System: This system is what we mentioned earlier which involves the use of two or more tokens to control the contraction and expansion of the supply. One of the most examples of this is the Basis Cash system which involves two other mechanisms called Shares and Bonds to control the price of Basis Cash. When the price of Basis Cash goes below $1, the system will print more coins, and the sellerwas given a share of these newly minted tokens. When the price goes above $1, the investors are allowed to purchase bonds that will pay them returns first from the newly minted tokens than the shareholders. This is again one of the attempts that stands the benefits everybody when the market goes up but when the market is down the coin literally plunges into a death spiral. Other examples of this system include Empty Set Dollar and Dynamic Set Dollar.
  3. Fractional Algorithmic Stablecoin: This system comes as a combination of regular stablecoin and algorithmic stablecoin which involves the use of physical collateral and codes to maintain its stability. This system is adopted by Iron Finance and Titan in 2021 with Iron Finance the stablecoin being backed by 75% of fiat collateralized USDC and 25% Titan, the native token within the ecosystem. Unfortunately, this system creates buying pressure for Iron Finance and inflates the supply of Titan which pushes both of these tokens down to a death spiral.

Is it Sustainable?

There is some merit in the idea of creating decentralized stablecoins as it is quite possibly beneficial of having a stablecoin that can be a safe haven but is not quite affected by the off-chain factors such as inflation or economic crisis. The promise that it will enable crypto space to build a truly decentralized world is why there is so many attempts made on this idea. But the question to be asked is can we really prevent those outside factors from the crypto space?

Source: https://netfreeman.com/2022/131/202205150705148979.html

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Nagaya Technologies

Nagaya Technologies

NAGAYA (NGY) is a Gold-Backed Cryptocurrency with Subsidiary Projects. We aim to build Trust and Value through LEGALITY and TRANSPARENCY. https://nagaya.co/