Algorithmic stablecoins face a complete "avalanche." After upgrading for self-rescue, is there still a chance for resurgence?

This article was published in the vernacular blockchain, author: Master Wuhuo Qiu.

At the beginning of the year, the craze for algorithmic stablecoins came quickly and left just as fast.

Second-generation ESD, imitating DSD; third-generation Basis, imitating Mith, ONS; fourth-generation Frax, XUSD, and so on, without exception, token prices faced halving, followed by knee cuts, and then ankle cuts…

Instead, the once-silent pioneer of algorithmic stablecoins, AMPL, has recently started its performance again during the frenzy of other algorithmic stablecoins.

This is AMPL's quiet self-rescue journey while others are going crazy. Now ESD, Basis, and others are also embarking on their self-rescue journey.

In this article, we will review what each has brought out as treasures or tricks to save their "pathetic" token prices.

AMPL

Liquidity Mining, Cross-Chain, Collateral

More than two months ago, AMPL quietly began to take action, with three main directions: liquidity mining rewards, cross-chain, and collateral.

On November 21, AMPL announced a new round of fountain rewards, totaling 3.9 million AMPL. On the 24th, Sushiswap launched, and on the 25th, Balancer launched, with the liquidity pool exceeding 1 million dollars in just 4 hours.

On the 26th, Balancer officially announced a governance vote to raise the AMPL mining cap from 1 million dollars to 3 million dollars, followed by another vote in mid-December to increase the mining cap to 10 million.

In December, the AMPL Foundation announced that AMPL tokens would launch on the Tron, Acala (Polkadot), and NEAR blockchains in the coming months.

It is very clear that 2021 is the year of cross-chain opportunities, and stablecoins must be "shitty coins" that "stand on several boats."

On January 15, AMPL co-founder and developer Brandon initiated a proposal in the Aave community to add AMPL as a collateral asset in the Aave protocol.

Just two days ago, a new round of AMPL fountain plans was launched again. In addition to the automatic continuation of the previous three reward pools, a multi-asset pool of AMPL/WBTC/ETH will also be opened on Balancer.

The foundation believes that BTC, ETH, and AMPL are the three most important native base assets in the cryptocurrency field and the three cornerstones for building DeFi finance, thus designing this "trinity" liquidity pool with a 33% weight ratio.

It can be seen that AMPL's development model has been continuously expanding towards higher liquidity and convertible collateral within the DeFi system, and the token price has steadily remained above water in the past two months.

However, the real test will be whether the token price and market value can stabilize after these fountain plans are canceled, which is the true challenge for AMPL.

Some say that AMPL's single token rebase is too outdated and has been surpassed by its successors, while others argue that in the blockchain world, the old is still the best; pioneering projects in any field often receive the greatest consensus and highest rewards, just like the "weak" performance of BTC.

Such questions cannot be resolved, and only time will provide the answer.

ESD - V1.5

Change Token Model

As a second-generation algorithmic stablecoin with a dual-token model, ESD was completely relegated after a brief period of popularity. The token price performance in the past two months has been the worst among all stablecoins, without exception.

The previously highly anticipated ESD V2, which was to be upgraded to a partially collateralized algorithmic stablecoin similar to Frax, has been paused, replaced instead by the V1.5 version, but the overall goal remains largely unchanged.

In the recently released version 1.5 introduction, ESD's token model has undergone a complete transformation, introducing the Continuous ESD dual-token model, with ESDS as the governance token and seigniorage shares, while ESD will serve purely as a stablecoin.

ESD can always be minted from reserves at a rate of 1 USDC, and can also be burned to redeem for RR USDC (where RR is the current reserve ratio, capped at 1.00).

ESDS can be purchased through reserves and can be burned when ESD issuance income causes RR to exceed the target value, or minted and sold if RR falls below the target value.

V1.5 is expected to undergo auditing in the first quarter and launch in the second quarter. The token price of ESD has finally been stimulated by this news, rising significantly from the bottom; however, whether ESD can restore its former glory under the pressure from AMPL, Basis, and Frax remains uncertain.

Basis

Grand Vision in Three Steps

The reason many people in the industry are optimistic about Basis is twofold:

First, it removes the rebase function from Bac, making it easier for a pure non-rebase Bac to participate in the DeFi ecosystem, whether as a medium of exchange or collateral.

Second, many believe that Basis is actually the ancestor of the rebase model; it was just that the original BaseCoin was delisted by the SEC, and then AMPL absorbed its elements and launched first, while the anonymous team of BasisCash took the original Basecoin white paper much later.

However, in terms of design, BasisCash retains the "orthodox rebase" algorithmic stablecoin model of the original Basecoin with its three-token model, rather than the single-token model of AMPL.

The debate over which is superior, three tokens or a single token, is reminiscent of the POW vs POS debate back in the day.

From heated discussions in WeChat groups to well-reasoned analyses by various influencers, and even academic discussions in scholarly papers, each side has its valid points. However, what is likely to happen in the end is that both can coexist well, just like today's PoW and PoS.

Basis has also made significant moves in the past two months, first redesigning its website UI, followed by the release of the V2 roadmap, which will be divided into three phases:

Phase One: Short-term Strategy. Transfer liquidity to Stableswap pools, providing better rewards for liquidity providers while integrating borrowing protocols to increase demand for BAC.

Phase Two: Mid-term Strategy. Expand the foundational ecosystem through various applications to increase BAC demand, making BAC a stablecoin supported by real-world use cases.

For example, providing services similar to savings accounts and launching the Basis Synthetic Asset Protocol. This may be the most critical factor in whether Basis can succeed, as discussed in previous articles, 2021 is bound to be a year where synthetic assets shine.

Phase Three: Long-term Strategy. Plan to launch the dynamic automated market maker Basis Swap based on Basis Cash, building its own stablecoin system and making BAC a routing asset similar to ETH in Uniswap.

Frax

Breaking Through

Frax has successfully broken through as the first algorithmic stablecoin listed on Binance this week.

Compared to other third-generation stablecoins, Frax, being a partially collateralized algorithmic stablecoin, mainly relies on arbitrage to maintain token price stability, thus being much more stable than the previous three generations' "printing money out of thin air" style.

Since its launch over two months ago, it has only experienced one relatively large surge and drop, after which it has remained relatively stable and steadily rising, with its listing on Binance marking a short-term victory.

Recently, Frax has been mostly positive, collaborating with CRV and Sushi, receiving endorsements from AC, and listing on Binance, with future plans for secondary collateral and buybacks.

With more complex mechanisms like PID control algorithms, and due to the initial collateral minting, redemption, and arbitrage mechanisms, Frax's stablecoin has been similar to Dai from the start, fluctuating around 1 dollar, with stability far surpassing the previous generations of algorithmic stablecoins, leading to much higher market recognition and acceptance.

The upcoming challenge for Frax lies in the gradual decrease of the USDC collateral ratio and the gradual increase of the FXS collateral ratio, which will make Frax "more and more like" the previous three generations of algorithmic stablecoins, posing new challenges to the system's reliability.

However, reaching this stage will take time, and by then, Frax's market capitalization should be several orders of magnitude higher than it is now.

Fifth Generation Stablecoins?

New Explorations

Currently, two new types of stablecoins have emerged on the market, exploring another direction.

The first is called Float, currently in a single mining state like USDT. Float's mining is a significant highlight, with strict account restrictions; accounts must have participated in previous DeFi project community snapshots to be eligible, and each account has a limit of 30,000 dollars.

This ensures that only experienced DeFi players who actively participate in governance can join, while also resisting the capital of whales. This fair distribution model has received praise from many influencers and may lead a new wave of Fair Launch.

The second is called Rai - Reflexer Lab. Its biggest highlight is a reflective bond system; in the founder's own words, Rai is a washing machine, but it is not used to wash clothes, rather to temporarily wash away the volatility of collateral.

The commonality between the two is that neither is pegged to the dollar; Float is pegged to the real market value of the crypto market, while RAI is pegged to a dynamically adjusted price.

The difference lies in that Rai mints stablecoins first and then issues equity tokens (currently, Rai can only be bought on Uni, and the equity and governance token FLX has not yet been released), while Float issues equity tokens Bank first and then mints stablecoins.

Conclusion

Algorithmic stablecoins are referred to as the holy grail of blockchain DeFi; who will ultimately prevail remains unknown. These can be seen as the self-rescue journey of algorithmic stablecoins, or as an upgrading journey.

We have reason to believe that in the next 1-2 years, there will be 1-2 dominant algorithmic stablecoins integrated into major DeFi protocols, serving as collateral for lending or as mediums of exchange.

At that time, the last piece of the DeFi puzzle will be completed, and the "eternal bull market" of DeFi and even the entire blockchain industry may begin at that point…