From Ampleforth to ESD, from Basis to Frax, algorithmic stablecoins are constantly iterating, causing huge waves. At 16:00 on January 13th, we invited three core developers of algorithmic stablecoins, the founders of Frax Finance, Coordinator of MITH Cash and co-founder of PEGS Cash, to discuss “the future of algorithmic stablecoins” with BlockArk chief analyst Moc. This is the first time that the Chinese crypto community has a public dialogue with multiple algorithmic stablecoin developers. This AMA is supported by BlockArk, ChainNews, Odaily, BlockBeats, and EncryptClub. Here is the recap.
Hello everyone, I am Moc, the chief analyst of BlockArk.
BlockArk is an investment banking and marketing firm, providing branding, user growth and marketing advisory. Founded in 2017, BlockArk has a background from Accenture, Tencent, Samsung and PwC.
We are so proud to invite 3 core developers of algorithmic stablecoins to discuss the “future of algorithmic stablecoins”.
SauR0n：Sauron bleeds evil but in this case, believes in the Mithril cause and uses his evil instincts to coordinate efforts between the team and community.
Sam：I’m Sam Kazemian founder of Frax Finance, the first fractional algorithmic stablecoin. Before Frax, I was the co-founder of Everipedia.org. Now I’m working on the fastest-growing algorithmic stablecoin project in the space.
James：Hi this is James from Pegs Cash. Pegs Cash is an algorithmic bank backed by real assets. We aim at exploring the wide adoption of algorithmic stablecoin in the crypto world.
Moderator Q&A Session
What do you think of AMPL/ESD, the earlier algorithmic stablecoins? Is your own project algorithmically innovative? What are the advantages and disadvantages?
SauR0n (Coordinator of MITH Cash)：We believe that a seigniorage shares model, that separates the stablecoin from the inflation token, has the best chance of wider adoption. Our team continues to innovate on a daily basis, with 3 passed Mithril Cash Improvement Proposals (MIPs)
Sam (Founders of Frax Finance)：Frax is the most innovative algorithmic project currently in crypto. We introduced the concept of a “fractional-algorithmic stablecoin.” The name FRAX means fractional-algorithmic currency. Before FRAX, there was no partial-collateral design and as you can see in this panel itself, there is already another project inspired by our design. So yes, I think we are the most innovative project in the space as of today.
James (Co-founder of PEGS Cash)：We think that AMPL and ESD are relatively close.ESD has reduced volatility by allocating dividend rights to locked LPs and DAOs and has developed debt functions to ensure that ESD values do not deviate too much from 1. But when the ESD gets too much in debt, it can’t repair itself.
PEGS is an algorithmic stablecoin with asset collateral, so it can better anchor 1U and realize the value of 1U. At the same time, compared with MKR, PEGS tokens have more value capture function, can be used as collateral, and enjoy the dividends and buyback destruction.
Moc (Chief analyst of BlockArk): In general, we think that Basis’s algorithmic central bank model and Frax/Pegs’s mortgage algorithmic stable currency model are more forward-looking representatives, so this time we invited them to share.
What is the necessity of algorithmic stablecoins? What are the application scenarios in the future? We see that algorithmic stablecoins are not used as circulation no matter whether it is fundraising, exchange trading pairs, or reserve pools like Curve. People think that the algorithmic stablecoin is a variant of ponzi, how does the algorithmic stablecoin prove its use value?
SauR0n (Coordinator of MITH Cash)：At MITH Cash, we strongly believe that decentralized stablecoins will be the currencies of the future. The space is new and evolving quickly with a combined market cap of over $600M. Our project is only 2 weeks old, and we are already working with many DeFi partners to foster wider adoption across the board including more trading pairs and an upcoming StableSwap pool.
Sam (Founders of Frax Finance)：Algorithmic stablecoins increase capital efficiency and create trustless mediums of exchange. Algorithmic coins are the first fully decentralized way to hold stable purchasing power without the custodial risk. I think they will continue to be one of the most important parts of DeFi.
James (Co-founder of PEGS Cash)：Algorithmic stablecoins definitely need to be embedded in the crypto economy to realize their self-worth. At present, the market is mainly dominated by centralized stablecoins such as USDT. But with the stricter regulation, there must be room for algorithmic stablecoins in the future. Anti-censorship is the strength of the algorithmic stablecoin.
Some people doubt this as Ponzi, the reason comes from the scalability, no matter AMPL, ESD model of the single currency, or Mith, Frax, Pegs dual-currency model, has the scalability design. This design has two sides, although in the short term will give people the sense of Ponzi, there’s no denying it also greatly increases the user group of the algorithm stable coin. AMPL has proved that.
Moc (Chief analyst of BlockArk): The supervision of USDT has always been a potential black swan risk. Although the applicability of algorithmic stablecoins has not been revealed in the short term, it is definitely worthy of long-term attention.
In the early stage of project operation, the way to attract users is mostly to give high APY to improve TVL. But after a period of time, the APY of liquid mining will inevitably decrease. In this case, how can we continue to attract external users to continue to follow the project?
SauR0n (Coordinator of MITH Cash)：Bootstrapping new DeFi projects through liquidity mining is a good way to get new projects off the ground. At MITH cash, our strategy revolves around generating new use-cases for MIC. We have many ambitious plans to make Mithril Cash as ubiquitous as USDC. However, our primary focus at this time is ensuring that MIC stays on peg and expands to a substantial circulating supply. We will then be in a much stronger position to develop and release new uses for MIC.
Sam (Founders of Frax Finance)：We have one of the longest LP programs lasting around 3 years. By the time that 3 years is over, FRAX will either be larger than Tether and USDC or we will have to vote with governance how to create new LP programs. Tether and USDC don’t need any LP programs haha they are already the most liquid cryptos and I think FRAX could get close to it this year.
How to solve the problem of algorithmic stablecoins returning to $1 after falling below $1. We are concerned that ESD and BAC have been below $1 for a long time. When we observed that many investors felt panic about the BAB‘s 38 million redemptions. And we also believe that a high premium pricing method such as BAB=BAC*BAC will generate more BAC circulation and cause market pressure. How to break this debt black hole when investors lose their confidence?
SauR0n(Coordinator of MITH Cash)：It is natural for investors to worry, given the price action we have seen in the space over the last few weeks. At MITH cash, we follow an iterative process that seeks to learn from industry experiences and we constantly adjust our protocol in order to make it more robust. With regards to debt issuance, we believe that the large number of bonds issued shows that investors have confidence in the protocol’s ability to return to peg and expand again. It would be more concerning if there was no demand for bonds. Pricing is not the only issue here. We believe that tweaking our bond redemption mechanism and establishing a secondary market for bonds would alleviate many investors’ concerns about the lack of exit liquidity once bonds are purchased.
How to solve the problem of algorithmic stablecoins returning to $1 after falling below $1. Frax Finance’s design is to guarantee redemption ability through the value of the collateral. The proportion of Algorithmic in Total Value is no longer small. If there is a crisis at this time that causes the prices of FRAX and FXS to fall, there will be panic and no one will use the recollateralize function, even if it is used, it will cause greater FXS selling pressure. At this time, there will be a problem of insufficient collateral, how to ensure that the FRAX price can be re-anchored to $1.
Sam(Founders of Frax Finance)：So far after 3 weeks of launch, this has not happened a single time with FRAX 🙂 so until it actually happens, in my opinion, we don’t need to worry about it.
Moc (Chief analyst of BlockArk): We believe that in reasoning, no project party has proposed a solution to the negative rebase that we think is bright. This point has yet to be verified. Basis Cash is undergoing this test, and we need to maintain continuous attention.
In historical experience, most of the forks will fail, and we have also seen a large number of projects that imitate Basis have failed. MITH Cash and Pegs Cash as forks, what changes have been made to Basis Cash and Frax Finance. How did MITH Cash and Pegs Cash succeed?
SauR0n(Coordinator of MITH Cash)：MITH Cash has forged our own path on our quest to become the One Algo Stable to Rule them All. Rapid iteration is key. Ideas are a dime a dozen, execution and speed differentiate winners from laggards.
- Seigniorage and Bond redemption threshold reduced to 1.01.
- DAO fund is funded by just 1% of Seigniorage for a lean operation.
- MIS stakers will now earn 20% of Seigniorage when bonds are outstanding.
- Time-weighted staking in the Boardroom has been voted on.
- Giving MIS stakers additional rewards through a staking pool/community vault is being considered.
James(Co-founder of PEGS Cash)：Thanks for the question. The fork is usual in the crypto world, and for the most occasions, it’s not going to be able to dislodge the status of the inventor.
We were early players and supporters of Basis, MITH and FRAX. We’ve seen MITH’s grow, and we’ve seen MITH’s speed in DAO governance and iteration, which may be the reason why it has recently outperformed Basis in the marketplace and community. We also hold a significant amount of FXS, and as Sam said, we were inspired by FRAX. We choose Frax because there was scare of selling from private investors in the early community. As Sams said, we were inspired by FRAX. This led us to the idea of doing a collage-based algorithmic stablecoin for a Fair Launch.
At the same time, we also believe that the current economic model of FRAX does not effectively energize the share token, so we propose the design of dividend. We believe both Frax and PEGS are pioneering experiments in the great crypto economy. And the ultimate option is depending on the market.At the same time, we don’t see Frax as a competitor. The collateral algorithmic stablecoin is a growing market that can accommodate enough players.
Moc (Chief analyst of BlockArk): From the investor’s point of view, we do not reject forks, but reject the proliferation of forks with no new ideas. At least during this time, MITH’s overall performance is respectable, and PEGS has yet to be shown.
Is there any more open thinking for the design of algorithmic stablecoins?
SauR0n (Coordinator of MITH Cash)：At MITH cash, we try to find a balance between simplicity and robustness of the system. By starting with a fairly simplified protocol, we have built a strong foundation from which to launch the future MITH ecosystem. We definitely agree that there is room for improvement. As Andre tweeted recently, constant product AMMs are not ideal for stablecoin swaps. We’re working on our own innovative design that we’ll be sharing shortly. Great things are coming from MITH cash!
Sam(Founders of Frax Finance)：Yes, Frax will be leading the way in fractional-algorithmic design a lot this year. We have many integrations in the pipeline and new features coming like a bond token and updated collateral options so that it is not just USDC.
James(Co-founder of PEGS Cash)：One of the things that we find interesting is that the demand for stablecoins is not just for dollars, but also for euros, yen, yuan, etc.
These currencies do not have good crypto stablecoin products due to their size. For non — dollar asset investors to face the risk of exchange rate fluctuations. The framework of the collateral-based algorithmic stablecoin is suitable for solving this problem. We have that in our roadmap as well.
Thank you for sharing, I have benefited a lot. If users have questions, we have 10 minutes of free questioning time, and our staff will collect and translate them.
Free Q&A from Communities Members
I want to ask MITH. MIC and BAC fell to less than $1 at the same time a few days ago. Now the price of MIC has been fixed, but BAC is still below $1. Some people think that it’s Jeffery Huang’s increasing positions and support that makes the MIC community regain confidence. If Jeffery doesn’t want to play one day, will MIC crush?
SauR0n(Coordinator of MITH Cash)：I cannot comment on Machi’s position because I’m not monitoring his wallets. However, it is true that we have major community members increasing position and new community members joining taking up new positions, which results in a strong peg of our MIC to $1.
May I ask Sam, I really like Frax’s design, especially the sentence: “Let the market choose the share of algorithmic stablecoins”, do you have any plans to further increase Frax’s market demand? Cause most value of FXS is from FRAX market demand:).
Sam(Founders of Frax Finance)：Yes, we want to get help from community members to increase our integration with other DeFi Dapps. If you are in the FRAX community and hold FXS, help the project get listed on your favourite DeFi platforms because that is how we expand.
Hello Sam, I’m a loyal user of FRAX and have been participating in FRAX project since the beginning. But during this process, I found that many of centralized parts of FRAX, such as the price Oracle are constantly changing, the collaborative ratio can be directly modified by the contract creator, and the functions of governance and DAO on the web page are actually not open. When will FRAX give these permissions to the community?
Sam(Founders of Frax Finance)：We are actually going to renounce ownership of keys as soon as enough FXS is emitted to make governance actions on the governance module. We also have set up a https://snapshot.page/#/frax.eth to allow for governance voting on important parameters. Right now, we have a bit of team control since we are not anon but after a few weeks, we will fully move over to the governance voting mechanism only+timelock.
Hey, guys, do you think that with more and more severe supervision, is it possible to bypass supervision to a certain extent by using algo stablecoins?
Sam(Founders of Frax Finance): 100% yes, another way I like to think about algorithmic stablecoins is “trustless mediums of exchange”
SauR0n(Coordinator of MITH Cash)：Sam is right: By definition, algo stables are in themselves trustless mediums of exchange
James(Co-founder of PEGS Cash): Compared with the centralized stablecoin, the biggest advantage of algorithmic stablecoin is that it does not rely on any centralized institution to issue.
Anti-censorship is its biggest feature. The big reason for this algorithmic stablecoin explosion is that people have become less trust of institutions and more trust of math itself.
A year later, if MIC has not found a wide range of application scenarios, and the liquidity mining of MIS is finished, what will be done then?
SauR0n(Coordinator of MITH Cash)：Finding application scenario is the easy part. Once you’re able to prove consistent reliable peg, the application will come. 1 year is the time we have set for the project to achieve consistent peg.
Will digital RMB(DCEP) have an impact on a stable currency?
SauR0n(Coordinator of MITH Cash)：For sure, anything related to the Chinese economy will have a major global impact. This is The Economy that the world is watching. How it will impact stable currency remains to be seen.
Sam(Founders of Frax Finance): I really like how the digital RMB has a lot of promising use cases. I think it will lead the way in many parts of finance. I actually think it is a brilliant move to create it. But overall, I think there is a great use for FRAX as well as digital RMB together even domestically in the PRC since they have entirely different use cases and denominations. I think they are symbiotic and help each other’s value overall.
James(Co-founder of PEGS Cash): I agree with Sam that this is a good move. To some degree, I think centralization and algorithmic stablecoins will co-exist. In particular, the native DeFi stablecoin usage scenario will definitely be the home field of algorithmic stablecoin in the future.
A simple question to ask FRAX: why not use USDC directly, but use FRAX which mainly depends on USDC pledge?
Sam(Founders of Frax Finance): Because FRAX is not completely backed by USDC. It is only 85% back right now. Maybe next month it is only 65% backed. In 3 months maybe it could be 40% etc to 0%…and after a long time of FRAX usage, it could be almost entirely algorithmic, private, and trustless stablecoin that is more stable than other algorithmic tokens that started at 0%.
Thank you all for the fantastic sharing! May I ask @JamesKarn that with the involvement of seigniorage for every pegs, how can we provide the pegs cash to be declined under $1?
James(Co-founder of PEGS Cash): In theory, the PUSD was worth $1, but in times of market panic the PUSD could reach $0.9, in which case clever users could make an arbitrage by buying the PUSD and making a profit of 0.1U.The act of buying will drive 1PUSD=1USD.
Learn more about projects
MITH Cash: https://mith.cash/
Frax Finance: https://frax.finance/
Pegs Cash: https://www.pegs.cash/