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Popular Science: Visual Explanation of Algorithmic Stablecoins



The use of stablecoins has exploded in the last year, yet fewer and fewer people understand how stablecoins actually work. For some reason, the creators of stablecoins are obsessed with complex designs, and almost every white paper is bogged down in equations and newly invented jargon, as if the creators are trying to convince you: trust me, you're not smart enough to understand this. But I disagree with this point of view. At the end of the day, all stablecoins are pretty simple by design. Next I will show you a simple visual language to understand how all stablecoins work. Think of each stablecoin protocol as a bank, each with assets and liabilities, somehow capturing value and distributing that value to "equity" holders. A normal full reserve bank model, as shown in the figure above, has its actual assets on the left, that is, the actual dollar reserves it holds, and its liabilities (called "digital dollars") on the right, which are claims on reserve assets. In a full reserve bank, each liability is matched 1:1 with reserve assets. If someone owns a digital dollar and claims cash back, the holder will be provided with physical dollars and the corresponding digital debt will be destroyed. This is how Tether, USDC, and other fiat-backed stablecoins work. American rapper Megan Thee Stallion collaborates with Cash App to release a Bitcoin science video: American rapper Megan Thee Stallion has released a video titled "Bitcoin for Hotties" in collaboration with Cash App, a mobile payment service developed by Square. The video explains what Bitcoin is and why it is valuable from her point of view. Megan Thee Stallion has more than 24.1 million followers on Instagram and 6.4 million followers on Twitter. (Bitcoin News) [2021/8/8 1:41:10] The equity of the bank belongs to the shareholders (investors of the bank), who profit from the fees charged by the bank. In Tether's case, the owners of Tether Ltd. are shareholders whose profits come from Tether's minting and redemption fees. Every liability of a full reserve bank should be closely tied to the dollar, since it is always redeemable for $1 of reserves. As long as banks maintain cheap convertibility, arbitrageurs will have no trouble maintaining their dollar peg. So, it's an ordinary full reserve bank. It's an obvious model, but it will help illustrate how crypto banks are different. Full Reserve Crypto Stablecoin How to create a fully encrypted reserve bank whose liabilities are stable dollars? Given that cryptocurrencies have reinvented money, the first thing to do is to exchange dollar assets for crypto assets. But cryptocurrencies are volatile, so if your debt is denominated in USD, the 1:1 guarantee will not work. If the value of cryptocurrencies falls, the bank will face undercollateralization. Live | Huobi China launched a new book on digital economy and blockchain industry science popularization: Jinse Finance Live Report, on December 6th, hosted by the Department of Industry and Information Technology of Hainan Province, co-organized by the South-South Cooperation Financial Center, Hainan Ecological Software Park, Huobi The "Hainan Free Trade Port Digital Economy and Blockchain International Cooperation Forum" hosted by China was held in Haikou. This is the world's first blockchain ministerial forum. At this forum, Huobi China held the ceremony of “Release of New Books Series of Science Popularization on Digital Economy and Blockchain Industry”, hoping to help practitioners, universities and research institutions gain a deeper understanding of the blockchain industry through teaching materials, professional education, training and other means. Blockchain, so as to establish a global knowledge model of blockchain, and truly promote the application of blockchain. Yuan Yuming, CEO of Huobi China, introduced that the United Machinery Industry Press will launch a series of teaching materials "Blockchain Introduction", "Blockchain System Design and Application" and "Blockchain New Business Model Analysis" for general higher education. One of the earliest blockchain teaching materials promoted; Huobi China is also actively participating in the research of the digital economy. The new book "Understanding Libra" published by CITIC Publishing House has been launched; "Advanced Guide to Blockchain Technology" will be available in December; the first collection of the most complete blockchain application cases in the industry "100 Cases of Blockchain Industry Applications" was published for the first time in this forum. [2019/12/6] So, just do the obvious thing: put an extra crypto buffer to give you a buffer if your crypto asset crashes. Basically this is how MakerDAO works. News | Sina Finance: Official media reports on blockchain have shifted from popular science propaganda to anti-counterfeiting supervision: According to today’s news from Sina Finance, the “1025 New Deal” is full moon, and within a month, the official media’s attitude towards blockchain has changed. According to a statistic in early November, seven party media published 65 directly related reports within a week of the New Deal. At that time, the key words in the articles were data, industry, security, innovation, etc., and a large number of articles were biased towards popularizing the concept of blockchain As well as the application introduction, there are only 3 articles that remind vigilance of virtual currency hype. Recently, the focus of criticism from official media has been pointing to the issuance and hype of virtual currency in the name of blockchain. According to statistics, from October 25th to the noon of November 25th, there were 28 articles collected and reprinted by Xinhuanet and, with the theme of cracking down on virtual currency or exposing scams using blockchain. Among them, on November 19th There were as many as 15 articles in the week from November 25th. These articles mainly focus on three points of view: clarify the relationship between blockchain and virtual currency, explaining that the two concepts are not equal; crack down on fake "blockchain" scams, or expose virtual currency scams; remind the public that blockchain cannot be a The gimmick of hype is not a signboard of deception. We need to be alert to such activities and invest rationally. [2019/11/26] Dai’s peg is currently stable. Note that reserve assets are significantly greater than total liabilities (Dai), which ensures the safety of the entire system. Now let’s look at Synthetix, which takes a different approach: instead of holding a diversified basket of crypto assets, Synthetix has issued a sUSD stablecoin against its own SNX token. This SNX is also a "stock token", in other words, the only asset Synthetix allows as a deposit is its own token. Due to the high volatility of SNX, Synthetix requires a 600% overcollateralization of every sUSD in circulation. News | The central bank’s official Weibo republished the old article "Re-popularization of Science": Fan Yifei explained digital currency in detail: According to China Economic Net, today, the headline of the central bank’s official micro-public account republished the headline of the central bank’s official micro-public account on January 25, 2018, titled " Some Considerations on the Central Bank’s Digital Currency” article, once again popularizing the central bank’s digital currency. At the same time, the second article of the WeChat public account published the speech by Mu Changchun, deputy director of the payment department, at the third Yichun Forum of China Finance Forty on August 10. In recent years, the central banks and monetary authorities of major countries and regions have been conducting research on the issuance of central bank digital currencies. The central bank of Singapore and the Swedish central bank have begun relevant experiments, and the People's Bank of China is also organizing active-zce exploration and research. [2019/8/21] The anchor exchange rate of sUSD is currently stable. Both MakerDAO and Synthetix are similar to traditional full reserve banks, except that their assets are over-collateralized in cryptocurrencies. In a way, their peg is secure because there is some mechanism for converting the stablecoin into its underlying asset. (In both approaches, there is an interest rate system that targets a desired price.) There is another kind of stablecoin, often called an "algorithmic stablecoin". Algorithmic stablecoins are not redeemable at all and have no depositors in the traditional sense, making them less like traditional banks and more like central banks. (Central banks tend to use methods other than callable rights to keep prices stable.) Each algorithmic stablecoin works a little differently. In order to analyze an algorithmic stablecoin, one needs to try to understand how it works in two important situations: when the stablecoin is above the peg, and when the stablecoin is below the peg. Voice | Martian circle of friends popular science RAM: Martians posted in the circle of friends, "What is RAM? Simply put, it is the land of the country EOS, and all economic activities are inseparable from the land. As long as the BPs of EOS can vote to form With a stable supply expectation and without changing the current Bancor algorithm, then the subsequent price of RAM may be like the housing price trend in Beijing, Shanghai, Guangzhou and Shenzhen. It is not enough for housing prices to fall, nor for housing prices to rise too fast. The political ecology of EOS is more and more like a certain country It’s really interesting.” [2018/7/6] Algorithmic Stablecoin Structurally speaking, the simplest algorithmic stablecoin is Fei. Fei, who broke away from the peg almost immediately, has also gained notoriety of late. The following diagram introduces how Fei works: Fei's current anchor position has been broken. Fei operates much like a real central bank, defending its peg directly in the market. Note that Fei is not meaningfully over-collateralized and the majority of its assets are in cryptocurrencies. This means that in the event of a black swan event, Fei's assets could be significantly lower than its liabilities, making it impossible to maintain its peg. Fei's algorithmic mechanism is quite complex, all of Fei's trading activities are conducted through Uniswap, and a technique called "reweighting" is used to conduct actual transactions, and "direct incentives" (actually a kind of capital control) are used. But the end result is the same: the protocol participates in the open market, driving prices towards the peg. Similar to the Celo protocol for algorithmic central banks, it issues a stablecoin called Celo Dollar (cUSD). Celo Dollar uses CELO as its reserve collateral (Celo's native asset), along with a diversified portfolio of other cryptocurrencies. Like Fei, the Celo Protocol has been consistently trading Celo Dollars on the market using a Uniswap-style model. The Celo Reserve is initially composed of a large number of reserve assets, which are designed to remain overcollateralized at all times. If Celo's assets fall below 200% of its liabilities, the system will recapitalize by charging transaction fees for CELO transfers. Therefore, the main difference between Celo and Fei besides their trading mechanism is the assets they hold and the rules around staking. The Celo Dollar peg is currently stable. A third stablecoin of the same type is Terra’s UST. Its collateral is LUNA, Terra's native asset, and like FEI and Celo, the Terra protocol acts as a market maker for stablecoins. If the stablecoin system runs out of assets, it replenishes the inventory by increasing the native LUNA supply. The UST peg is currently stable. Fei, Celo, and Terra do not allow redemption. Instead, they trade their own currency on the open market, which means they are willing to buy and sell for the difference. On the surface, this might seem quite different from redemption, but it's actually a closer continuum than it appears. This is because, economically speaking, a credible commitment to market making is the same as allowing minting and redemption. Imagine a stablecoin collateralized by ETH, call it a STBL token, and the protocol introduces the ETH/STBL pair to the market. This means the protocol will be willing to sell 1 STBL for $1.01 ETH and buy 1 STBL for $0.99 ETH. If STBL falls below the peg rate, it will continue to trade STBL until its ETH is depleted. If the STBL token were instead minted and redeemed, it would potentially allow anyone to mint 1 STBL for $1.01 ETH and redeem 1 STBL for $0.99 ETH. If STBL is lower than the peg rate, it will continue to redeem ETH with STBL until its ETH is exhausted. In traditional central banks, market makers do not allow redemptions, instead allowing more discretion to the central bank. But algorithmic market making is different because smart contracts can make unbreakable, self-enforcing promises. So market making and callability are two paths to the same goal: providing liquidity and ensuring a tight peg. Having looked at central bank-style algorithmic stablecoins, there is another, more stable algorithmic stablecoin: Seigniorage Shares. Mint-Share Stablecoin The classic mint-share stablecoin is Basis Cash, based on its unissued predecessor, Basis. It is probably the quintessential algorithmic stablecoin from which many other designs have since been derived. A video showing the working principle of Basis Cash, the video link address: Currently, the anchor rate of Basis Cash has been broken. Basis Cash can be thought of as two phases of operation: Basis Cash is in a contraction cycle when there are bonds outstanding, and the money supply is not growing fast enough to pay off all system debt. However, if demand continues to increase, eventually all bonds will be paid off, the system will enter an expansion cycle, and shareholders will once again be rewarded with freshly minted Basis Cash. The newly minted Basis Cash is "seigniorage", that is, the profits that the central bank obtains by issuing new currency. Normal central banks keep seigniorage on their balance sheets for emergencies. Basis Cash, on the other hand, pays all seigniorage to shareholders the moment it is received. This makes Basis a very "guaranteed efficient" with no assets on its balance sheet at all. This enables it to support a very large high stablecoin supply on 0 assets. However, it also makes it vulnerable to a "death spiral" or crisis of trust. In fact, Basis Cash does. Most of the subsequent algorithmic stablecoins are descendants of the Basis design, including the last stablecoin we will examine. ESD (Empty Set Dollar) is a stable currency carefully issued by an anonymous founding team. The original version of ESD (ESD v1) was designed based on Basis Cash. The peg of the ESD v1 has been broken and has since moved to a new design. The innovation of ESD lies in the integration of equity tokens and stable coins, which means that if stable coins are mortgaged, more stable coins will be generated.


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