What is an Algorithmic Stablecoin?
Even if you still are a cryptocurrency enthusiast and haven’t yet started trading in the market, you must’ve heard the term stablecoin. Stablecoins are a specific category of cryptocurrency that is pegged to a more stable asset to minimize volatility. Generally, these stable assets are fiat currencies, such as USD, Euro, or Pound Sterling.
In a very short span, stablecoins have managed to gain much traction in the crypto market. At the time of drafting this article, their combined market capitalization was more than $110 billion, while the trading volume had crossed the mark of $40 billion.
In such a market scape, when stablecoins are registering significant volume and growth, a new product or crypto-paradigm has made its entry. They are called algorithmic stablecoins. These products are also witnessing significant traction, and many of the market experts are recommending them for inclusion in a trader’s crypto portfolio.
To decide whether you should include the currency in your portfolio, you must have a clear idea of what algorithmic stablecoins are. Here, we address that.
Algorithmic stablecoins are also, like stablecoins, tokens pegged to fiat currency. Usually, this fiat currency is the US dollar. The unique feature that this special category of stablecoins has is that they respond to market events based on predetermined stabilization measures hardcoded into Ethereum Smart Contracts. This feature helps increase decentralization by creating the scope for a smart, fast, and responsive global currency that is not under the purview of a single institution. Moreover, it can act as a medium of exchange for not only the world of decentralized finance but the entire world.
How Do they Work and What is Their Advantage?
There are two broad functional categories of the algorithmic stablecoin. The first category, which is the earlier one, is that of “rebase” coins. These rebase coins include the likes of Ampleforth or AMPL. Rebase coins remain stable by transferring the volatility from price to market cap. For instance, if AMPL trades at a price more than $1.05 or less than $0.95, it destroys the tokens and issues new ones to the holders, ensuring that the price is set back to $1. In effect, what happens in this model is that instead of the price changing with varying demand, the market capitalization fluctuates. The price remains stable.
The other category of algorithmic stablecoins follows the multi-token model. Let us understand this model with the example of Basis Cash, an algorithmic stablecoin following the multi-token model.
Basis Cash has three varieties of tokens: Basis Cash (BAC), Basis Shares (BAS), and Basis Bonds (BAB). Out of these three, Basis Cash is a stablecoin, maintaining a peg to $1. Basis Bonds can be redeemed at par for Basis Cash. Now, if the price of BAC goes below $1, users can buy BAC for that discounted price and redeem them for BAB. The holders of Basis Shares benefit from the minting of new BAC, as Basis Shares are very closely related to the value of the protocol.
The advantages of algorithmic stablecoins are multiple. As there is no regulatory body looking over the balance of supply and demand, they bring real decentralization to the world of DeFi.
The presence of the code makes it highly scalable and the absence of tangible asset requirements keeps away the possibility of error at the user’s end.
The coins, programmed with a code, are openly auditable, making them trustworthy and transparent.
Why Do They Perfectly Complement the Portfolio?
There are multiple short, medium, and long-term reasons why you should have an algorithmic stablecoin in your portfolio. In the near term, it serves the purpose of diversifying your cryptocurrency portfolios, while in the medium and long run, it would expand its benefits by serving as reserve collateral in decentralized banks and an alternative to central-bank money adaptable to stocks.
The algorithmic stablecoins are non-dilutive, implying that your percent ownership of the network remains unchanged even when the number of coins you own is changing each day. The unique benefits of the rebase-model coins allow it to decouple from Bitcoin’s price pattern, reducing the scope of systematic risk. Otherwise, cryptocurrencies are tremendously correlated. Algorithmic stablecoins also help to solve the supply inelasticity problem. They are not vulnerable to sudden shocks in the market.
Why Should it Be Exactly CLAIM?
If you are now thinking about which algorithmic stablecoin to go with, CLAIM could be a perfect option for you. Claim Finance empowers users to pledge their assets and generate cUSD stablecoin for capital circulation. Inherently, it is an algorithmic stablecoin. Although the widely adopted model of DeFi stablecoins has been minting against pledged assets, Claim does not entirely rely on the current value of mint’s assets. It uses the expected future returns of the assets as trusted collateral. This way, the stablecoin’s asset utilization efficiency improves.
Moreover, in the Claim protocol, users can deposit their assets for capital allocation and generate investment income. Since the ROI in these assets also serve as the support value of Claim’s credit system, you can benefit from credit leverage formed by the expected return of assets.
Claim protocol is extremely safe to work with. Not only all operations are performed through smart contracts the funds are secured by multi-signature design, pool separation, proxy contract, and more, isolating the user’s assets and platform insurance hedging funds.
You will get CLAIM tokens in many DEXes, including Dodo, Hoo, and Pancake Swap.