Stablecoins have been hitting headlines recently and for good reason. Stablecoin utility is at an all-time high and their versatility is being captured in ways we’d have never imagined just six months ago. Even JPMorgan Chase executives are weighing in on stablecoin regulation.
Stablecoins are tokens built on top of blockchains, with values pegged to conventional currencies such as the US dollar. This allows users to exit volatile assets into stable units with minimal volatility, meaning they:
- Can be used as a convenient medium to settle balances between different exchanges, wallets, and even banks (in the case of USDC).
- or be used as a way for traders to park the profit or value against other volatile cryptos like BTC or ETH.
It’s understandable that stablecoins have been playing an essential, if not, critical role in the crypto ecosystem today. With Tether and USDC being the most commonly adopted stablecoins.
There are a variety of different stablecoins on the market. Where each stablecoin caters to different users and has different pegging mechanisms. With parameters such as collateralization, centralization, governance, supplementation, composability, and team background, etc. For example, USDC is a centralized and collateralized stablecoin, as it’s issued by Circle with every USDC pegged to one USD that Circle has stored in the custodian. DAI, on the other hand, is a decentralized but collateralized stablecoin with its supply based on the ETH and other assets staked in the MakerDAO vaults. It’s worth noting that normally you should always be able to redeem your stablecoins to USD or other assets on at least a 1:1 basis.
Algorithmic stablecoins, however, are a new breed in the market. Putting the “stablecoin” title aside, they are first and foremost tokens with native supply and price stabilization algorithms, with the goal to keep the token price on track towards a certain set price, normally denominated in US dollars. The price of the algorithmic stablecoins is also often highly reflexive at the beginning based on the market demand and supply, hoping it would eventually plateau close to the $1 range. One of the core concepts in algorithms and mechanics here is called “rebase”. Rebase is normally triggered at a predefined condition or interval so as to correct the imbalances between supply and demand, by issuing more tokens when the price goes higher. On the other hand, various mechanics would be introduced to reduce the supply when the price drops.
The origin of this genre goes back as far as in 2013 with a project called Bitshares. The DeFi boom in 2020 also pushed several new implementations of algorithmic stablecoins such as AMPL, BASED, YAM, and later ESD, DSD (a fork of ESD), Basis Cash (a fork of Basis), Mithril Cash (a fork of Basis Cash) to the market’s attention. ESD, in particular, gained a lot of traction, peaking at over $560 million USD in market cap leading this category.
The Value Proposition
With more building blocks merging in the DeFi economy, quality collateral is a fundamental requirement.
When a highly volatile asset like ETH is used as collateral, the system would likely require over-collateralization or even increase liquidation risks for margin calls for borrowers or traders. While a normal stablecoin reduces the risks above, it doesn’t generate additional yield from the assets locked up.
Here is where the algorithmic stablecoins may come into play. In an ideal world, algorithmic stablecoins could provide fluid collateralization so as to generate rewards while minimizing volatility.
ESD vs DSD vs BAC vs MIC
There are several algorithmic stablecoin projects on the market. They often need to go through several rebase or expansion (price or market cap going up) / contraction (price or market cap going down) cycles so as to track the price towards a stable zone, and hopefully a stable price eventually.
It’s also worth noting that unbonding ESD from the DAO requires a “staging” period, in which ESD tokens are temporarily “staged” for 15 epochs (5 days), neither tradable by their owner nor accruing inflationary rewards. ESD’s staging model thus functions similarly to Basis Cash Shares, as both bonding ESD to the DAO and purchasing Basis Cash Shares presuppose risk (liquidity risk for ESD; price risk for BAS) with the potential for future inflationary rewards.
Introducing Universal Dollar (U8D)
Existing algorithmic stablecoin projects have gained incredible traction and see high trading volumes and liquidity. They’ve been regarded as exciting instruments for speculation, arbitrage, and trading. But at the end of the day, they do not fulfil the purpose of being stable units of value. We need an algorithmic stablecoin that can get out of initial bootstrap volatility as fast as possible and provide a smooth expansion and contraction phase towards a stable zone. Based on the ESD success we are creating a new algorithmic superfluid stablecoin, Universal Dollar (U8D), with better capital flow by adding several unique components.
Similar to ESD (and by proxy, DSD), U8D has elastic supply and moves between expansion and contraction periods.
Expansion: When TWAP > 1 USDC, the protocol prints additional U8Ds which distribute between DAO and LP participants to incentivize them to sell and bring the price to the peg.
Contraction: When TWAP < 1 USDC, the protocol issues debt which can be converted to coupons by burning U8Ds with a premium determined by supply/debt ratio. Coupons can be redeemed back to U8D 1:1 when TWAP returns to the peg. By burning U8D for coupons, participants are helping the price return to the peg.
Now let’s see what makes U8D different:
In pre-existing projects, there has always been a risk of a sudden dump from DAO participants which are unlocking their tokens from the liquidity pool and DAO bonding, which brings significant price volatility and speculation in the run-up to the tokens actually unlocking from the DAO. Instead of just waiting in anxiety for your tokens to be unlocked from staging(after bonding), U8D gets rid of ESD’s lockups periods and allows users to instantly stream it to the wallet in small portions (a portion per block, similar to how founder shares in utility token projects are vested in tranches). Users can Unbond tokens from the DAO to Stage, and then are able to start a Stream from Stage to their wallets, so tokens will be unlocked and applied for withdrawal by a portion. The Base Stream Time is 3 days for DAO and 1.5 days for LP rewards.
We also get rid of Fluid/Frozen status. Therefore, users can always deposit/provide USDC to earn rewards. On the other hand, Once you send tokens to stage, the only way to withdraw it is streaming.
There is also a possibility to have fast streaming which can reduce stream time by a factor of 2, but this also applies a penalty to the network participant (25% penalty in U8D currently in stage).
If the TWAP is above 1$, this penalty will be instantly distributed 70/30 to DAO and LP bonders (which gives bonders more incentives to bond).
If the TWAP is below $1, this penalty will be burned (thus the price will increase).
When you accelerate the streaming of your LP tokens (only possible when there are no more claimable rewards) then the penalty portion of the LP will be removed from the Uniswap pool, USDC will be used to buy tokens from the market and then all tokens are distributed to DAO and LP, or burned, as it was described above.
Overall streaming helps the system to prevent huge price fluctuations and smoothing curves, bringing the system to better stability.
U8D will launch without a pre-mine, nor an investor or team allocation. In contrast to other implementations of this idea that had announced their launch after several days of purchasing and bonding tokens into the DAO privately, while advancing epochs without the public, we will take the fair launch a step further:
- There are first 10,000 U8D minted and sent to deployer address.
- Then deployer adds 10,000 USDC and 10,000 U8D to seed the Uniswap pool.
- Then received UNI-V2 LP tokens are sent to the 0x000…0 address.
Launch: Jan 23th 12 AM UTC+0
0x78c54b20CC4C2db6E7A9758aE16579D866BA6FFDUniswapV2 USDC:U8D Pair
0x111eB123d0CEeEa59A3736ae1767F9E756bE8160LP Incentivization Pool