A Comprehensive Understanding of the Three New Algorithmic Stablecoins: Fei, Float, and Reflexer
The old generation of algorithmic stablecoin projects that have made no progress have gradually faded from people's view, while many new projects are emerging.This article is sourced from PANews, authored by Jiang Haibo, and edited by Tong.
Stablecoins, as the underlying assets of DeFi, have surpassed a market capitalization of $50 billion and continue to grow rapidly. As a branch of stablecoins, algorithmic stablecoins are hoped to solve the centralization issues of fiat-collateralized stablecoins and the low capital utilization of collateralized stablecoins. However, there have not yet been any very successful projects in this space.
Last year's star algorithmic stablecoin projects Ampleforth (AMPL), Empty Set Dollar (ESD), Basis Cash (BAC/BAS), and Frax (FRAX/FXS) have all performed mediocrely. AMPL has long maintained a level slightly below $1, sustaining slight deflation. ESD has basically gone to zero due to its excessive circulation, making it difficult to eliminate the bubble.
The bonds of Basis Cash do not expire, which increases the difficulty of returning to above $1, and its mechanism is not sufficiently refined. Frax can redeem for $1 worth of assets and can integrate with DeFi applications like Curve, but its collateralization ratio has not continuously decreased. However, for now, Frax remains one of the most likely algorithmic stablecoins to achieve application.
Older generation algorithmic stablecoin projects that have made no progress have gradually faded from view, while many new projects are emerging. This article will introduce several algorithmic stablecoin projects that will officially launch soon, detailing their mechanisms and gameplay.
Fei Protocol
Fei Protocol has already attracted significant attention even before its official launch, with investments from well-known institutions such as A16Z, Framework Ventures, and Coinbase Ventures providing excellent publicity.
Fei Protocol believes that existing DeFi projects that rely on Total Value Locked (TVL) cannot be sustainable; they can only achieve sufficiently high TVL when they offer high rewards. There are many opportunities in the market, with high-yield projects emerging daily, and funds left in projects are disloyal, likely to shift to other projects. Recent examples of this are Alpaca Finance and Big Data Protocol, where platform tokens were rapidly sold off after large funds withdrew, prompting further capital flight and creating a vicious cycle.
In contrast, Fei Protocol proposes a Protocol Controlled Value (PCV) model, where the assets deposited in the contract will be directly owned by the protocol, and users cannot withdraw these assets. This allows the protocol to use these assets more flexibly to align with its fundamental goals. Fei Protocol uses these assets to maintain the liquidity of FEI and achieve price stability for FEI.
Price Stability Mechanism
When the price of FEI remains below $1 for an extended period, anyone can trigger a peg restoration to bring the price back up. The protocol will withdraw all owned liquidity, use the reclaimed ETH to buy FEI up to the peg price, and the remaining ETH plus FEI will be re-provided as liquidity, with the excess FEI being burned.
In addition to the protocol's active operations, there are mechanisms that encourage users' spontaneous actions to anchor the price.
When the price is below the peg price, selling users will incur an additional 4% loss, while buying users will receive an additional 2% reward.
Participation Method
The genesis phase will be the best time for users to participate in Fei Protocol to obtain the algorithmic stablecoin FEI and governance token TRIBE.
The genesis phase of Fei Protocol is from March 23, 03:01 to March 25, 03:01 Beijing time, with a joint curve price ranging from a minimum of $0.5 to a maximum of $1.01. Fei Protocol will also provide a reward of 10% of the total TRIBE for users who purchase FEI during this phase.
Users depositing ETH from the joint curve will use all of it to provide liquidity for the Uniswap ETH/FEI trading pair, and this liquidity belongs to the protocol itself and will not be withdrawn by users.
To prevent "scientists" from front-running during the initial liquidity provision for the FEI-TRIBE trading pair, Fei Protocol also allows users to choose to directly exchange the FEI they hold in the genesis allocation for TRIBE, with users free to choose from various exchange ratios. This atomic transaction accompanies the protocol's launch and cannot be front-run by bots.
Participating in Fei Protocol during the genesis phase is a good choice, though there are risks involved. The purchase price may exceed $1, and if sold below the peg price, there will be a 4% loss. Since the project requires participation in ETH, price fluctuations during the settlement process will affect the amount of FEI received.
Float Protocol
Unlike Fei Protocol, Float has not raised funds and was established by a group of anonymous researchers, with a more community-oriented token distribution.
Float Protocol believes that during periods of monetary expansion, the purchasing power of fiat currency will be eroded by inflation, making it meaningless to tie stablecoins to a specific fiat currency.
Float has two tokens: the stablecoin FLOAT and the BANK token, which serves to stabilize value and governance. FLOAT is defined as a low-volatility currency, with an initial target price based on the golden ratio of 1.618. The price is not stable and will change based on its own demand and the demand for cryptocurrencies in the treasury. According to official calculations, even during the severe price fluctuations of ETH in 2020, FLOAT's target price would still fluctuate steadily.
After experiencing two phases of BANK token distribution, the FLOAT token will begin to be minted. The first phase started on February 8, and the second phase will start on March 22.
First Phase (First 6 Weeks)
Users who have participated in governance can mine BANK in the first phase using DAI, USDC, or USDT, with a deposit limit of $10,000 per address for each token. This approach has yielded good results, as BANK tokens have not been sold off, and so far, the returns from stablecoin mining have exceeded double.
Second Phase (Weeks 7-8)
After the first phase ends, BANK tokens will be distributed to a broader community. This phase will have no whitelist restrictions and will also include new non-stablecoin pools. The second phase will also conduct BANK-ETH liquidity mining to better discover the value of BANK.
Initial Minting of FLOAT
Eight weeks after the distribution of BANK begins, the minting of FLOAT will start, allowing users to purchase FLOAT tokens with ETH and using 5% of the total BANK supply to incentivize purchases.
Inflation and Deflation of FLOAT
FLOAT is backed by reserve assets in the treasury, and users cannot directly exchange FLOAT for reserve assets from the protocol. In the v1 version, the treasury only holds ETH.
The inflation and deflation of FLOAT are determined by measuring whether the reserves are sufficient, based on the time-weighted average price (TWAP) of FLOAT and the target price. If TWAP is above the target price, inflation occurs; if TWAP is below the target price, deflation occurs.
The method of inflation and deflation is influenced by the Vault Factor, which measures whether the reserve assets are sufficient. Vault Factor = Value of ETH locked in the treasury / Market capitalization of circulating FLOAT at target price. If Vault Factor > 1, it indicates that the treasury is in surplus; if Vault Factor < 1, it indicates a deficit.
During the inflation phase, arbitrageurs will pay ETH and BANK at a price higher than the target price but lower than the market price to obtain FLOAT through a Dutch auction. If in surplus, the portion above the target price will be paid in BANK, consuming more BANK; if in deficit, part will be paid in ETH and part in BANK, replenishing more ETH to the treasury.
During the deflation phase, arbitrageurs will sell FLOAT to the protocol at a price lower than the target price but higher than the market price through a reverse Dutch auction. If in surplus, the protocol will pay users entirely in ETH, with BANK unaffected; if in deficit, the protocol will pay with part ETH + minted BANK, reducing the protocol's expenditure.
Participation Method
Users on the whitelist can directly participate in stablecoin staking mining with stablecoins, allowing for zero-cost participation in subsequent phases.
In the second phase, users can participate in single-token staking mining with their held tokens.
In the early stages, purchasing BANK tokens prepares for the second phase of BANK/ETH liquidity mining, and after the third phase of arbitrage begins, BANK will also see high demand.
Participating in FLOAT's arbitrage may present more opportunities, especially if the FLOAT price deviates more from the target price in the early stages.
Reflexer
Reflexer is also a project with numerous institutional investments, with participation from Pantera Capital, Lemniscap, Paradigm, MetaCartel Ventures, Divergence Ventures, Standard Crypto, The LAO, and team members from Compound, a16z, Synthetix, and Aave.
Compared to other algorithmic stablecoins, Reflexer is closer to MakerDAO. During the rapid decline of ETH prices on March 12 last year, many debt positions in Maker were liquidated. Subsequently, Maker increased the diversity of collateral assets by adding WBTC and others as collateral for DAI. Then, the categories of collateral assets gradually extended to fiat-collateralized stablecoins, which also introduced counterparty risk for Maker.
Reflexer aims to create an improved product, where RAI can be understood as a low-volatility version of ETH. Like the original DAI, RAI's collateral is solely ETH, generated through over-collateralization.
RAI is not pegged to any currency, with the initial redemption price starting from the mathematical constant π (3.14), and a series of parameters are used to reduce volatility. From the official website, it can be seen that RAI's redemption rate has remained close to zero, which is the difference between RAI's redemption price and market price, so RAI's price has not significantly deviated from the system's redemption price recently.
Participation Method
Since the collateral assets in RAI can be redeemed, the risk is relatively low, making it suitable for broader user participation. If RAI can generate sufficiently high returns, it can be utilized.
Once the platform token FLX is issued, users will receive retroactive rewards starting from March 8, with this round of rewards distributed to users who mint RAI and provide Uniswap RAI/ETH liquidity. Minting and providing liquidity must be satisfied simultaneously. Currently, the RAI-ETH trading pair's liquidity ranks third on Uniswap.
Summary
From the above content, it can be seen that current algorithmic stablecoins tend to include corresponding assets in the treasury to support the price of the stablecoin, which is completely different from AMPL, ESD, BAC, etc. Relatively speaking, today's algorithmic stablecoin projects are more transparent and practical. FLOAT and RAI are not pegged to $1, with the former starting from the golden ratio of 1.618 and the latter from π (3.14), which can be seen as a low-volatility currency; although FEI is pegged to $1, its price may deviate significantly from $1, but the mechanism of burning 4% when sold below $1 can better help the price recover. The participation threshold for algorithmic stablecoin projects is gradually increasing, from initially obtaining stablecoin staking mining to now where Fei is controlled by the protocol, and the participating funds cannot be redeemed, requiring a better understanding of the project.
