Over the past few months, there have been a vast amount of Algorithmic stablecoins that have spawned with the aim of becoming the next foundational stablecoin for DeFi.
These algorithmic stablecoins attempt to achieve their stability without external collateral like USDC, which uses US Dollar, or DAI, which uses other erc-20 tokens as collateral.
Algorithmic stablecoins like Basis Cash, ESD, DSD, or TerraUSD have the intention of acting as a central bank themselves to maintain a price peg through a plethora of coupons and bonds.
It's a pretty complex thing for starters. I'll do my best to explain how they "function"
The price peg of these stablecoins is designed to be, naturally, at 1 (be it USD, GBP, EUR). If the price of the stablecoin slips beneath the targeted peg, the protocol issues “bonds/coupons,” which can be bought at a particular discounted price. These bonds can be redeemed in different ways, but they are typically redeemed when the stablecoin price goes back above the peg.
On the other side, if the price of the stablecoin is above $1, then coupon holders can redeem their coupons - and are likely to sell it to drive the stablecoin back down to $1. Once all coupons have been redeemed, if the price stays above $1, the protocol eventually prints more stablecoins to be distributed amongst the protocol shareholders.
This forms the basis of most of these algorithmic stablecoins. As mentioned, there are many variations, such as burning the stablecoin when issuing the coupons and providing expiration dates on when coupons can be redeemed.
Here are a few core examples of these algorithmic stablecoins;
- Basis Cash - This pretty much follows the scenario explained above.
- Empty Set Dollar - In this protocol, coupons that are priced at a discount can only be bought by burning ESD, shrinking the supply.
- Dynamic Set Dollar - Similar to ESD with coupons, but the premium from the discount is calculating depending on the debt ratio in the protocol.
- TerraUSD - Adjusts the supply according to fluctuations in demand with the help of $LUNA
Go ahead and click on any of these links, you'll see by yourself the actual price of so-called algorithmic stablecoins.
These ‘coupon coins’ cannot actually restore price pegs as the design of the protocol provides instability itself.
Additionally, the further the price is from the peg, the less likely speculators will buy the next coupon round - which increases the chances for the peg to break for good.
The above diagram illustrates this scenario. Each time the price returns to P0 (the pegged value) all coupon holders dump, leading to a larger drop in the price until the next issuance of discounted coupons. This situation continues as time progresses.
On top of this, the stablecoin holders have no probability of gain as any newly minted coins go to coupon owners. Holders retain the probability of loss if the peg breaks - so they will likely dump, causing further instability.
It is quite some death spiral that occurs as time progresses.
In fact, Brandon Iles, founder of Ampleforth, actually worked on removing these bond mechanisms before the inception of Ampleforth. The debt-based regulation (through coupons) would never hold up to keep the peg in place in their analysis.
There is one algorithmic stablecoin that skirts past these problems. I’m sure you can take a guess what it is with the paragraph above….
That's Ampleforth (AMPL)
This is the one algorithmic stablecoin that has totally removed the debt marketplace and fractional reserve system within its ecosystem.
Not only doesn't have collateral but also there are no bonds or coupons that appear at discounts when the price heads beneath the peg. Instead, there is just a pure algorithm in place that produces its own inflation in the circulating supply according to the market conditions.
Sure, AMPL is still extremely volatile right now as it bounces above and below the $1.02 (2019- CPI-adjusted US Dollar) peg.
Here's the thing barely few pay attention to.
Are you ready?
Since its inception, AMPL has actually managed to maintain this $1.02 peg as this is the average daily closing price when calculated from CoinMarketCap data;
Instead of AMPL becoming wilder in its oscillations over time, the opposite is true. Its wild volatility begins at the start of the protocol, and it becomes increasingly less volatile over time until it starts to level out at the peg;
Those who can't see anything because they are using dark mode (this is what Andrew Kong cites):
So, despite what they say about AMPL - it keeps its $1.02 promise for more than 18 months of its existence.
Below I'm attaching a table of the key differences between AMPL and other algorithmic stablecoins that created while doing this research.