Source: “Searching for the Native Anchor of Algorithmic Stablecoins”

Author: Kyle, Investment Manager at Bing Ventures

Key Points:

• Bitcoin and Ethereum are forming powerful value networks. More importantly, they constitute the trust foundation of cryptocurrencies, which means that stablecoin projects attached to these value networks have solid asset backing. However, improvements in user experience and the scale of network-locked assets will be the main differentiators in their value metrics;
• Super applications with a specific user scale issuing their own stablecoins essentially bypass trust intermediaries and form minting contracts directly with their users. In this case, protocols like Curve, Aave, and Synthetix will become "super pawnshops." Their users will experience customized financial services faster and smoother than in the real financial world. The user base and business innovation determine their ceiling, and the author is more optimistic about Synthetix's development;
• Fully chain-deployed algorithmic stablecoins have the potential to achieve true decentralization, cross-chain interoperability, and infinite scalability, allowing them to be freely issued, transferred, and traded on any chain, thus realizing cross-chain interoperability and portability.
• Furthermore, in future developments, the Delta-neutral stablecoin model may become an important trend, but implementing this model requires corresponding futures protocol support and attention to risk control and market adaptability.

Algorithmic stablecoins are a type of algorithm-based cryptocurrency that primarily maintains price stability through algorithms rather than relying entirely on a reserve asset. However, in practice, some algorithmic stablecoins have not maintained price stability and face risks such as insufficient market liquidity and black swan events. Some believe this is due to the original sin of the algorithms.

This Bing Ventures industry research report focuses on the field of algorithmic stablecoins, discussing the types, mechanisms, and existing problems of current algorithmic stablecoins, as well as the direction for their further development. The author believes that as algorithmic stablecoins develop, they will form a global hierarchy of stablecoins. Some algorithmic stablecoins will become top-tier stablecoins, while others will constitute multi-layered peripheral supplements. Of course, unlike traditional currencies, the creation and trading of algorithmic stablecoins can occur globally, without being restricted by any country's regulatory framework. Therefore, algorithmic stablecoins are expected to become a major form of currency in the future decentralized financial world.

The Original Sin of Algorithmic Stablecoins

Algorithmic stablecoins adopt mechanisms similar to shadow banking, creating an offshore currency creation space. Unlike traditional stablecoins, algorithmic stablecoins do not require centralized institutions to maintain their stability; instead, they adjust market supply and demand through algorithms to keep their prices within a certain range. This form of currency also faces various challenges, such as insufficient market liquidity and risks from black swan events.

Algorithmic stablecoins use different algorithmic mechanisms to adjust their supply and demand to maintain their peg to a target value (usually the US dollar). Currently, two classic algorithmic mechanisms have formed:

• Rebase: Rebase algorithmic stablecoins influence the price of the stablecoin by changing the base supply. When the price of the stablecoin is above the target value, the protocol issues more tokens to lower the price; when the price is below the target value, the protocol destroys or repurchases some tokens to raise the price. For example, Ampleforth is an algorithmic stablecoin that uses the Rebase mechanism.
• Seigniorage: Seigniorage algorithmic stablecoins support the value of the stablecoin by issuing another cryptocurrency. When the price of the stablecoin is above the target value, the protocol uses Seigniorage tokens as collateral to issue more stable tokens and sell them to the market; when the price is below the target value, the protocol uses market income to repurchase and destroy Seigniorage tokens. For example, Basis Cash is an algorithmic stablecoin that uses the Seigniorage mechanism.

In addition to these two basic mechanisms, some emerging algorithmic stablecoin projects have attempted different innovative methods to maintain their peg. For instance, Frax is a partially collateralized algorithmic stablecoin that combines fiat collateral and the Seigniorage mechanism. Frax uses USDC as part of its collateral and dynamically adjusts its collateral ratio based on market demand. Unlike traditional stablecoins, the value of algorithmic stablecoins is not entirely supported by external reserves but is adjusted through algorithm-based market mechanisms to maintain price stability. However, in recent years, algorithmic stablecoins have also faced several issues, mainly including:

1. Supply and demand imbalance: When market demand for algorithmic stablecoins decreases, their prices fall below the target value, leading the issuer to destroy or repurchase part of the circulating supply to restore balance. However, this may further undermine market confidence and demand, leading to a vicious cycle; Terra is the most brutal example.
2. Governance risk: Since the operation of algorithmic stablecoins relies on smart contracts and community consensus, governance risks may arise, such as code defects, hacking, human manipulation, or conflicts of interest.
3. Legal regulation: Since algorithmic stablecoins do not have physical assets as collateral or anchoring, they face more legal regulatory challenges and uncertainties. It is expected that more countries or regions will restrict or prohibit the use of algorithmic stablecoins in the future.

Mainstream Mechanisms: Semi-Decentralized Over-Collateralized/Fully Collateralized

Currently, there are various algorithmic stablecoin mechanisms in the DeFi space, among which MakerDAO's collateralized lending mechanism is representative, issuing DAI stablecoins by locking collateral such as ETH while adjusting the supply of stablecoins based on market demand; and Aave's liquidity pool mechanism, which adjusts stablecoin prices in real-time based on supply and demand relationships, maintaining price stability through arbitrage across multiple stablecoins.

GHO: Aave's Deposit Support

GHO is pegged to the US dollar (USD) and is a decentralized multi-collateral stablecoin. Users or borrowers can mint GHO tokens using the collateral they provide on the Aave protocol. The collateral can be a basket of cryptocurrencies chosen by the user. When Aave's loan service users borrow GHO using cryptocurrency as collateral, Aave issues GHO tokens. When the loan is repaid, Aave destroys the GHO tokens associated with that loan, thereby reducing the number of tokens in the protocol. GHO tokens can be used for payments, lending, and other scenarios, and can generate returns as they automatically participate in liquidity mining on the Aave protocol.

GHO adopts the Aave V3 liquidity pool model, with Aave as the sole liquidity pool provider. Users need to use Aave V3 to purchase and use GHO stablecoins, and in the future, more liquidity pool providers may be added to achieve decentralized stablecoin issuance and trading. Only assets within the Aave protocol can serve as collateral for GHO tokens. All income generated from GHO stablecoins flows directly into the Aave Treasury and then into the Aave DAO. GHO is essentially a stablecoin that combines decentralization, multi-collateralization, and yield-generating features, offering certain innovative advantages, especially as it can seamlessly integrate with other services of the Aave protocol.

However, GHO's stability relies on the value and liquidity of its collateral. If the market experiences severe fluctuations or liquidity crises, GHO tokens may lose their peg and trigger liquidation. The risk management and degree of decentralization of GHO stablecoins remain issues worth attention. As the number of liquidity pool providers increases, risk distribution and benefit allocation may become more complex, necessitating a more robust decentralized governance mechanism to ensure the long-term stability and sustainable development of GHO stablecoins.

CrvUSD: LLAMMA Algorithm

CrvUSD is an algorithmic stablecoin designed around the Lending-Liquidating AMM Algorithm (LLAMMA). This algorithm maintains price stability by converting collateral (such as ETH) and stablecoins (USD). When the price of the collateral rises, users convert all deposits to ETH, but when the price falls, it converts to USD. Collateral options may also include positions in liquidity pools (LP).

This is very different from traditional AMM designs, which typically have USD as the top and ETH as the bottom. In the Curve algorithmic stablecoin, the purpose of the LLAMMA algorithm is to provide users with a soft liquidation window, converting collateral into LP positions to avoid liquidation of collateral in a short time. Curve's stablecoin mechanism maintains price stability and liquidity through cross-chain liquidity and multi-strategy pool liquidity convergence, as well as synergy with other DeFi projects. Additionally, Curve stablecoins can earn returns through trading, lending, and liquidity mining, incentivizing more users to participate in its ecosystem.

Frax: The Ambition of AMO

Frax is partially backed by collateral assets and partially supported by its native token (FXS). The ratio of these two in supporting Frax is called the collateral ratio. In this case, the general collateral is USDC. The Frax protocol adjusts the collateral ratio based on the market price of the FRAX token. If the FRAX token trades above $1, the protocol lowers the collateral ratio, reducing reliance on collateral and increasing the algorithmic portion. If the FRAX token trades below $1, the protocol raises the collateral ratio, increasing trust in the collateral and reducing the algorithmic portion. In this way, the Frax protocol attempts to achieve a peg between the FRAX token and the US dollar.

In its V2 upgrade, Frax introduced an Algorithmic Market Operations Controller (AMO) mechanism, reinvesting collateral into the Frax pool to generate additional income to support the protocol's growth. The Frax community has agreed to abandon the dual-token mechanism and raise the target collateral ratio to 100%, making Frax a more attractive asset for users to preserve value over the long term. The increase in the collateral ratio will be achieved through the AMO mechanism rather than by selling FXS tokens.

It allows for fully programmable monetary policy without lowering the collateral ratio or changing the price of FRAX. The AMO controller is a self-executing contract that can perform open market operations algorithmically but cannot break the support price solely by minting FRAX. The AMO controller makes FRAX one of the most powerful stablecoin protocols, creating the greatest flexibility and opportunity without altering the fundamental stability mechanism.

However, the Frax protocol still relies on external stablecoins as its last line of defense. If external stablecoins fail or are frozen, such as the recent USDC de-pegging event, it will affect the stability and security of the Frax protocol and the FRAX token. Frax also depends on the FXS token for its governance and incentive mechanisms; if the FXS token experiences price fluctuations or demand declines, it will also impact the operation and development of the Frax protocol and the FRAX token.

In summary, GHO and crvUSD have the advantage of having a stable market position and multiple use cases, while also possessing investment value. Although Frax has strong technical capabilities, it has not yet experienced large-scale market fluctuations, and its application scenarios and investment value remain to be observed. In future developments, GHO and crvUSD may further consolidate their competitive advantages by continuously launching new products and expanding use cases.

Current Issues

The main risk of the above stablecoins is that as the complexity of the protocols increases, the vectors for attacks become more diversified, potentially leading to a "sudden attack" on the entire ecosystem. In recent years, we have seen many stablecoin vulnerabilities leading to the complete collapse of protocols. At the same time, competition in the stablecoin space is fierce, with some decentralized stablecoins establishing significant moats in terms of on-chain liquidity and cooperation with other protocols (such as Aave and Curve). Additionally, native stablecoins from a single protocol may find it challenging to achieve deep liquidity, or the cost of doing so may be very high.

Currently, the development of stablecoins has two main directions: collateral-based stablecoins and algorithmic stablecoins. The former can also be called "pseudo-algorithmic stablecoins." However, both types of stablecoins have some issues. Collateralized stablecoins require a large amount of excess collateral, while the mechanisms of algorithmic stablecoins may lead to insufficient liquidity and unequal reward scales.

In contrast, the previously popular "liquidity collateral" model essentially places "protocol-controlled value" before "algorithmic stability." However, experiences over the past two years have shown that the design of "liquidity first, not collateral" also has problems, such as insufficient liquidity during market tightening, unfair rewards for holders and DAOs, which may lead to market manipulation by whales, detrimental to the long-term stability of the ecosystem.

1. Low Acceptance of Value Storage

Currently, these algorithmic stablecoins face certain difficulties in gaining user acceptance. The main reason is that their stability is not as strong as that of mainstream fiat stablecoins like the US dollar, and they are more often used as rewards rather than as a medium for value storage by users. DAI, as a pioneer of decentralized stablecoins, has already captured a certain market share. However, due to the rise of mainstream fiat stablecoins like USDC, DAI's position has also been somewhat challenged.

Moreover, the mechanisms of algorithmic stablecoins are often complex and difficult to understand, requiring users to hold multiple tokens and participate in various operations to maintain their stability. This increases the cost and risk for users, also diminishing their experience. Algorithmic stablecoins have not yet achieved widespread adoption, and their market share and liquidity remain relatively low. This limits their applications in payments, lending, cross-border remittances, and affects their attractiveness as value storage tools.

Therefore, the development of algorithmic stablecoins needs to further address their stability issues to better serve as value storage mediums. Additionally, algorithmic stablecoins need to focus more on user needs, such as providing higher yields to attract more users. By combining with physical assets, the liquidity and value of algorithmic stablecoins can be increased, enhancing their market competitiveness.

2. Dependence on Diversified Collateral

Currently, algorithmic stablecoin protocols still require a certain amount of collateral such as ETH and CRV, and only with the continuous growth of collateral value can scalability be maintained. Algorithmic stablecoin protocols also face actual risks from overall demand. Some protocols have even exhausted their insurance funds. Whether having more collateral is better is something the author is quite skeptical about.

In the short term, support from diversified collateral may enhance the network effects of the protocol, thus gaining more liquidity, especially during bull markets. However, in the long term, this is an irresponsible speculative attempt regarding the stability and security of algorithmic stablecoins themselves. We may need to draw more liquidity from centralized exchanges to improve the feasibility of algorithmic stablecoin protocols.

Especially for stablecoin protocols like Frax, although they adopt algorithmic stability mechanisms, their degree of decentralization decreases under strong redemption pressure, leading to greater risks for holders. The essence of the algorithmic stability mechanism should be under-collateralized, so its risks are relatively high. Mainstream DeFi protocols want their stablecoins to compete with centralized stablecoins like USDC, but this requires meeting regulatory requirements, which is difficult to achieve. Therefore, algorithmic stablecoins need to better address decentralization issues and find broader application scenarios to play a greater role in the future.

Exploring Decentralized Algorithmic Stablecoins

BTC/ETH Native Type

LUSD: Liquity's Native Stablecoin

LUSD is a stablecoin launched by Liquity. Liquity is a decentralized lending protocol that allows users to use ETH as collateral to obtain loans at 0% interest. The algorithm of LUSD requires borrowers to maintain an over-collateralization ratio; otherwise, their loans may be liquidated. LUSD claims to provide rigid redemption. LUSD also benefits from some non-mandatory mechanisms, such as the protocol treating LUSD as equivalent to the US dollar and the borrowing fees on new debt. These mechanisms can influence the supply and demand of LUSD and market expectations, keeping it stable between 1.00 and 1.10.

LUSD offers an interest-free lending method, allowing users to leverage the value of ETH to gain liquidity and improve capital efficiency. LUSD also has some innovative mechanisms to ensure its security and stability, such as collateral pools, stability pools, and liquidation mechanisms. However, LUSD may face competitive pressure from other protocols offering similar services, such as MakerDAO or Compound. At the same time, it must contend with regulatory pressures from different countries or regions regarding such stablecoins, such as the United States or the European Union.

DLLR: Sovryn's Sovereign Stablecoin

Sovryn's stablecoin is called Sovryn Dollar (DLLR), which is a Bitcoin-based stablecoin composed of various Bitcoin collateral. The goal of 1 DLLR is to maintain a close 1:1 ratio with the US dollar, providing a stable means of payment or savings. DLLR is composed of various Bitcoin stablecoins, such as ZUSD and DOC, which maintain a 1:1 ratio with the US dollar through different algorithms or protocols. DLLR aggregates these stablecoins to form a more stable stablecoin that can withstand market fluctuations and collateral risks. The supply of DLLR is determined by market demand; when the price of DLLR is above or below $1, arbitrage opportunities arise to restore its balance.

Sovryn is a decentralized finance (DeFi) protocol based on Bitcoin that uses zero-knowledge proof technology to protect user privacy. Sovryn allows users to engage in leveraged trading, perpetual contracts, lending, and other DeFi operations, and its security is ensured by the use of Bitcoin's security. All services on Sovryn are priced in Bitcoin (BTC) and are connected to the Bitcoin network. The platform's smart contracts run on Rootstock, a sidechain connected to the Bitcoin network. Sovryn is one of the next-generation permissionless financial applications that can provide cross-chain functionality.

Sovryn uses EVM smart contracts on the RSK blockchain and is connected to Bitcoin and the Lightning Network, Ethereum, and Binance Smart Chain. Most of Sovryn's features are inspired by the Ethereum protocol, and some code libraries are built using redesigned and audited branches. Rootstock, or RSK, is a fork of the Ethereum protocol, similar to other EVM-compatible blockchains. What makes Rootstock unique is its bidirectional peg to the Bitcoin network and its merged mining with Bitcoin. Sovryn's contracts are controlled by the Exchequer multi-signature, an anonymous group of key holders, except for the Staking and FeeSharingProxy, which can be updated based on the votes of SOV stakers. Changes to all contracts and project code libraries can be voted on in the Bitocracy DAO, where SOV token stakers have voting rights.

The potential of DLLR lies in its being a fully transparent, decentralized, and censorship-resistant stablecoin, solely supported by Bitcoin, without any intervention or risk from third parties or central authorities. DLLR can facilitate the circulation and use of Bitcoin, increasing its value and utility. DLLR can also provide a powerful lending tool for the Sovryn platform, allowing users to borrow or lend DLLR using Bitcoin as collateral, enjoying zero-interest rates and high yields.

Multi-Asset Type

sUSD: Synthetix Goes Out with Synthetic Assets

sUSD is a stablecoin issued by the Synthetix protocol, tracking the price of the US dollar through a decentralized oracle network. sUSD is a crypto asset-native collateralized stablecoin, meaning it is issued using Synthetix network tokens (SNX) as collateral. sUSD has a wide range of applications within the SNX ecosystem, as it can be used for trading, lending, storing, or exchanging other synthetic assets (Synths), such as stocks, commodities, cryptocurrencies, etc.

The peg mechanism of sUSD primarily relies on market arbitrage opportunities and supply-demand relationships. When the price of sUSD is below $1, arbitrageurs can buy sUSD with US dollars or other stablecoins on external exchanges, then exchange it for other synthetic assets (Synths) on the Synthetix platform, or use sUSD as collateral to borrow SNX or ETH. When the price of sUSD is above $1, arbitrageurs can use SNX or ETH to borrow sUSD on the Synthetix platform and then sell sUSD on external exchanges for US dollars or other stablecoins. Such arbitrage behavior increases the demand and supply of sUSD, pushing its price back to the pegged value of $1.

With the introduction of Atomic swap, Curve, and Perp V2, the application scenarios of sUSD have greatly expanded. This is aided by Synthetix's multi-chain deployment strategy. Especially in the multi-chain era, the prospects for synthetic assets are very broad. Additionally, the capital efficiency issues of sUSD are expected to be addressed in the V3 version, as the introduction of collateral similar to ETH will gradually reduce the collateral ratio, which will help increase capital utilization efficiency. As Synthetix gradually evolves into a super application for synthetic assets, we can expect sUSD to follow the favorable winds of synthetic assets and introduce more solid real asset support.

TiUSD: Multi-Asset Reserve

TiUSD is an algorithmic stablecoin issued by the TiTi Protocol, tracking the price of the US dollar through a decentralized, multi-asset reserve, using a mining mechanism to ensure its stability and growth. TiUSD is an elastic supply stablecoin, meaning its supply will automatically adjust based on market demand and price fluctuations. The reserve pool of TiUSD consists of various crypto assets, such as ETH, BTC, DAI, etc., which enhances the diversity and risk resistance of the reserve pool.

TiUSD ensures its growth through a decentralized, multi-asset reserve, using a mining mechanism. TiUSD can also utilize its elastic supply characteristics to automatically adjust its supply based on market demand and price fluctuations, thereby maintaining its price stability around $1. The drawback of TiUSD is that it faces competition and challenges from other algorithmic stablecoins, especially those with more complex or advanced algorithm designs or governance models, such as MakerDAO and Ampleforth. Additionally, TiUSD needs to ensure the diversity and risk resistance of its reserve pool to avoid risks of insufficient reserves or attacks.

Fully Chain-Deployment Type

USD0: Tapioca's Algorithm

LayerZero is an innovative cross-chain messaging infrastructure that allows tokens on different chains to be securely transferred without asset wrapping, intermediary chains, or liquidity pools. Big Bang is a fully chain-based currency market built on LayerZero, allowing users to mint a fully chain stablecoin called USD0. There is no borrowing limit, but there is a debt ceiling. The planned collateral for minting USD0 includes native Gas tokens (or their staked derivatives). These include ETH, MATIC, AVAX, wstETH, rETH, stMATIC, and sAVAX.

The peg mechanism of USD0 is based on an algorithm called Tapioca, which uses a dynamic debt ceiling and an adjustable stability fee to maintain a 1:1 ratio between USD0 and the US dollar. The Tapioca algorithm adjusts the debt ceiling and stability fee based on market conditions and changes in collateral value, thus affecting the supply and demand of USD0. When the price of USD0 is above $1, Tapioca increases the debt ceiling and lowers the stability fee, encouraging users to mint more USD0. When the price of USD0 is below $1, Tapioca decreases the debt ceiling and raises the stability fee, encouraging users to repay or purchase more USD0.

In theory, USD0 can be used on any chain. It does not require asset wrapping or intermediary chains, thus reducing costs. It can also leverage LayerZero for seamless token transfers and trading, and can integrate with other LayerZero-based applications, such as Stargate. However, its risks stem from the security and compatibility of the LayerZero protocol itself or its underlying chains.

IST: Achieving Cross-Chain Asset Transfers

The stablecoin IST of the Inter Protocol is a decentralized stablecoin protocol built within the Cosmos ecosystem, aimed at achieving asset transfers in a cross-chain ecosystem while maintaining a 1:1 parity with the US dollar, which is also one of IST's goals. There are three ways to mint IST: Parity Stability Module, Vaults, and BLD boost. Among them, the Parity Stability Module mints using specified stablecoins (such as DAI, USDT, USDC, etc.) as collateral, Vaults use crypto assets as collateral with different collateral ratios set by the DAO, and BLD boost mints IST using BLD as collateral, which does not earn node staking rewards but is used for debt repayment.

In terms of IST's stability mechanism, it is similar to DAI, including liquidation mechanisms, collateral ratio adjustments, setting debt ceilings, and a reserve pool to urgently reduce debt rates and BLD issuance for debt repayment. These mechanisms are controlled by fine-grained minting restrictions, creating a dynamic stablecoin model that has never existed before. The Inter Protocol is built on Agoric, a chain within the Cosmos ecosystem that allows smart contracts to be developed using JavaScript, with the token being $BLD. IST is not only a stable token but also the native fee token of the Agoric platform, providing some core functions and stability for its crypto economy.

Cosmos is known as the "Internet of Blockchains," achieving interconnectivity between blockchains through the IBC protocol, allowing asset transfers between different blockchains, enhancing the interoperability and scalability of blockchains. In the Cosmos ecosystem, stablecoins are a focus for many projects, and IST, as one of them, will provide a more stable and reliable value exchange tool for the cross-chain ecosystem.

With the growth and improvement of interoperability within the Cosmos ecosystem, there will be spillover effects on the Inter Protocol. As more protocols are built using the Cosmos SDK and utilize IBC for interoperability, the number of protocols that the Inter Protocol can interact with will also increase. Through other protocols, cross-chain bridges to other blockchains will continue to increase support for more chains and allow interaction between supported chains. The overall increase in liquidity and potential user numbers is highly beneficial for the Inter Protocol. Not only will applications on Cosmos be used more frequently, but the Inter Protocol stablecoin will also see more frequent usage.

Finding Real Anchors

Protocols like Curve are leading us into the next significant paradigm shift in DeFi. Specifically, DeFi protocols are beginning to realize that they need to control stablecoin issuance, liquidity systems, and lending markets. Frax and Aave are following closely behind. As more protocols attempt to solve the trinity problem, differentiating factors will no longer be the ultimate business model of the protocol but rather the starting point for achieving that ultimate form. Compared to MakerDAO, Curve and Aave have stronger brand effects and team strengths, thus their stablecoin development prospects are broader.

Currently, the demand for stablecoins is primarily divided into three categories: as value storage tools, stablecoins for trading and usage, and those who do not want to associate with fiat stablecoins. Meanwhile, the application of physical assets in algorithmic stablecoins still faces many problems and challenges, such as scalability and risks associated with physical assets. At the same time, many stablecoin projects focus more on the price stability mechanisms and decentralization of stablecoins, neglecting the actual product-market fit that users need. This is also a challenge for many stablecoin projects. In summary, the author is more optimistic about the following four directions for algorithmic stablecoin protocols in the future:

• Crypto-native stablecoin protocols, as Bitcoin and Ethereum are forming powerful value networks. More importantly, they constitute the trust foundation of cryptocurrencies, which means that stablecoin projects attached to these value networks have more solid asset reserves. However, improvements in user experience, the scale of network-locked assets, and robust liquidation protection mechanisms will be the main differentiators in their value metrics;
• Super applications with a specific scale issuing their own stablecoins, essentially bypassing trust intermediaries to form minting contracts directly with their users. In this case, protocols like Curve, Aave, and Synthetix will become "super pawnshops," and their users will experience customized financial services faster and smoother than in the real financial world. The user base and business innovation determine their ceiling, so I am more optimistic about Synthetix's development;
• Fully chain-deployed algorithmic stablecoins have the potential to achieve true decentralization, cross-chain interoperability, and infinite scalability, allowing them to be freely issued, transferred, and traded on any chain, ensuring sufficient and complete liquidity. More importantly, a fully chain insurance mechanism is more conducive to addressing liquidity crises during runs;
• Additionally, in future developments, the delta-neutral stablecoin model may also become an important trend, but implementing this model requires corresponding futures protocol support and a large futures market, while also needing to pay attention to risk control and market adaptability issues.

Is there a possibility that a certain algorithmic stablecoin protocol encompasses all of the above features? Unfortunately, the author has not yet seen such a project. Algorithmic stablecoins need an effective and reliable algorithmic design that can maintain price stability under various market conditions and ensure that extreme situations such as loss of control or collapse do not occur. A large and loyal user base can support its economic model and provide sufficient demand and liquidity. At the same time, a strong and innovative ecosystem can integrate with other on-chain or off-chain services and provide more use cases and value creation. At this point, the diversification of collateral assets may become less important; the author values the health of the value network and pegged assets more.

The rise of algorithmic stablecoins has its own logic and background, but this does not mean they can completely replace centralized stablecoins, especially in large-scale applications. Therefore, algorithmic stablecoins may need to seek a more efficient and scalable solution while ensuring security. Additionally, stablecoins like USDC, which are based on dollar collateral, still occupy a major position in the current market because their issuers have certain legal regulatory and economic strength, allowing them to provide more reliable guarantees for users. For those who wish to avoid legal regulation and centralization risks, algorithmic stablecoins remain a valuable option. However, we must acknowledge their limitations while actively exploring more innovative solutions to promote the development of the entire DeFi industry.