Unstable Algorithm Stable Coin Genealogy Analysis: AMPL, ESD, Basis Cash.
Author: Moc, Cofounder at BlockArk/Jimmi, Cheif Analyst at BlockArk
People who hold AMPL since July gain 88 times in one month.
We believe everyone who has experienced the DeFi bull market from July to September 2020 is familiar with AMPL. After you missed AMPL, you would not know you will continue to miss a series of algorithmic stable coin projects such as BASE, ESD, Basis Cash, etc.
Even though, there are still many people who are confused about the algorithmic stable coins because the threshold of DeFi operation is too high.
AMPL (Ampleforth) , the 1st generation algorithmic stable coin.
AMPL was launched on the Bitfinex exchange in June 2019 by means of IEO. Since the end of the IEO, AMPL’s price performance has been mediocre. Until June 2020, it launched liquidity mining program-Geyser. With the increasing Defi hype, its market cap has a increase of 2500x in 2020.
AMPL is designed as an asset anchored to the U.S. dollar. The supply of tokens is adjusted through the Rebase algorithm to ensure the anchoring of its price.
The Rebase mechanism of this “flexible supply” cryptocurrency is as follows:
If Pc <Pt-δ, the token supply pulls back, and the amount of all wallet balances will decrease proportionally.
If Pc> Pt+δ, the token supply expands, and the number of all wallet balances will increase proportionally.
If Pc is in [Pt -δ, Pt+δ], it doesn't trigger the rebase mechanism, and the token supply will not change.
Target price Pt, threshold δ and current price Pc.
The target price Pt is determined based on the 2019 Consumer Price Index CPI, and currently Pt is 1.021USDT. The current price Pc of AMPL is determined by the weighted average (TWAP) of multiple oracles in the market.
Rebase is not a dilution, because all accounts’ balances are adjusted proportionally, no matter it is a positive or negative rebase. Therefore, the proportion of AMPL held by users to the total amount remains unchanged.
Hierarchical adjustment of supply mechanism:
When a rebase occurs, the AMPLforth protocol will calculate the target supply based on the current price, and in order to avoid overcorrection, the protocol will not adjust the supply to the target value at one time but adopt a hierarchical adjustment of the supply strategy.
Simply put: if AMPL exceeds 1USDT, it will increase supply and bring the price back to 1USDT; if the price of AMPL drops below 1USDT, supply will deflate and bring the price back to 1USDT.
AMPL is not an algorithmic stable coin actually. AMPL should be accurately defined as a digital currency with flexible supply. AMPL is indeed unstable. Because of human nature, During additional issuance, due to the lag of the market, the price will not be corrected immediately. At this time, balance increase again, and it becomes a double profit situation where balance and token price both increase. This greatly stimulates holders to continue holding and attracts new investors. As long as the consensus is not broken, the market value growth will be multiples of the capital inflow. But conversely, when the currency price drops below 1USDT, there will be deflation. At this time, the holder will face a double loss of the currency’s price drop. The drop will greatly stimulate the holder to sell and curb new investors.
Under the distortion of human nature, the AMPL mechanism is more like a split pyramid rather than a stable currency. This mechanism is very in need of FOMO emotions. In fact, BlockArk understood this mechanism and participated in AMPL’s IEO at Bitfinex in 2019. however, there was no Fomo at the time, so the positive rebase mechanism failed. After AMPL launched on Uniswap in 2020, due to the constant product formula of AMM DEX, the number of AMPL rebased includes Uniswap’s LP pool, so the price will be corrected immediately at the moment of daily rebase. However, the power of human nature has far defeated this correction. On the contrary, retail investors think it is cheaper and continue to buy, and bringing more buying. It is the power of FOMO.
After the explosion of AMPL, there were a large number of fork projects. On the basis of AMPL, the anchor objects were modified, the cycle was adjusted or other micro innovations were carried out. A large number of fork projects such as RMPL, XMPL, TMPL, REBASE, xBTC, sBTC, etc. go viral.
BASE, exploded in December, made two major changes:
1. Change the classification adjustment of Rebase to immediate adjustment, and it becomes an accelerated version of AMPL, and brings great excitement.
2. Anchoring the market cap of the crypto market brings higher volatility, and volatility makes Rebase more frequent and intense, greatly intensifying the game.
This change in Base reminds people of the dividends of decentralized gambling in 2018. The frequency of stimulation continues to increase from week to day to hour.
Rebase is so successful that projects like YAM, that do not originally target algorithmic stable coins, also use Rebase’s mechanism for reference.
AMPL and its imitation projects are considered the first generation of algorithmic stable coins.
ESD, the 1.5th generation algorithmic stable coin
ESD is currently the second most valuable currency among algorithmic stable coins. Its form is between the first generation AMPL and the second generation Basis Cash, so we define it as the 1.5th generation.
ESD made the following improvements based on AMPL:
1. After rebase, if additional tokens are issued, the additional tokens will not be distributed to AMPL holders directly and evenly like AMPL. ESD holders need to pledge to obtain the newly issued ESD. There are two staking modes, either staking a single coin ESD into the DAO, and the DAO will get 77.5% of the newly allocated ESD, with 15 epochs to unlock; or staking ESD-USDC-LP into the LP Reward Pool, which will get 20% of the newly allocated ESD, with 5 epochs to unlock. (1epoch=8hours)
This ingenious design requires ESD holders to provide liquidity or reduce their liquidity in order to get rewards. This reduces the dump pressure and improves the stability of ESD. And the ESD quantity in Uniswap’s ESD-USDC pool will not be affected by Rebase, and it is easier to drive the positive rebase. We think this is a better design than AMPL.
2. After rebase, if deflation is needed, ESD do not deflate but absorb excess liquidity in the market through bonds. These excess liquidities buy Coupon. The value of Coupon to the purchaser is when ESD is issued again, Coupon holders will be given priority to.
It is worth paying attention that Coupon has a one-month time limit, and after the time limit is reached, it will be invalidated. Although the community believes this is a mechanism that hinders user entry, to some extent, it’s a correction for the system.
The bond model actually uses future earnings to fill the current deficit. Bond buyers save the system’s shortfall by sacrificing their liquidity and get future rewards.
One thing that has been criticized in the design of Basis is that when it encounters extreme market conditions, after massive deflation, if a large number of bonds are generated, the system may not be able to rely on self-repair to generate positive rebase to fill the gaps in these bonds. A large number of shortfalls will panic the newly entered funds. A Dead Time for bonds may be the solution.
Basis Cash, the 2nd generation algorithmic stable coin
Basis is an algorithmic stable coin project. It raised more than $100M in 2018. It was originally named Basecoin, and then it was withdrawn due to the U.S. SEC regulation.
Basis Cash draws on the design of Basis and adopts YFI’s fair distribution model.
The Basis Cash agreement includes three tokens — Basic Cash (BAC), Basis Share (BAS), Basis Bond(BAB). Basis Share and Basis Bond aim to move Basis Cash towards the price of $1. It uses three tokens to achieve inflation and deflation: BAC against U.S. dollars, BAS against stocks with the Fed’s voting rights and dividend rights, and BAB against U.S. dollar bonds. At the same time, it introduces Bond dividends as solution to the stalemate caused by the design of ESD bonds.
The mechanism is as follows:
When the trading price of Basis Cash is lower than $1, users will be able to purchase Basis Bonds at the price of BAC*BAC to ensure the stability of BAC prices. The purchased bonds can be redeemed at a ratio of 1:1 when the price of BAC is higher than $1.
When the trading price of Basis Cash is higher than $1, the contract will first redeem the Basis Bonds to adjust the price of BAC. If the price of BAC at this time is still higher than $1, the contract will cast new BAC and redeem it first. BAB is then allocated to users who pledge BAS in Boardroom.
In the YFI distribution model, we call the pool of YFI deposited in stable coins as pool 1, and the pool in YFI-DAI-LP as pool 2.
The Basis Cash model is a pool of 5 stable coins that lasts for 5 days, then the pool 2 produce BAS for BAC-DAI-LP, and the pool 3 produce BAS for BAS-DAI-LP. The output cycle of pools 2 and 3 is 1 year.
Staking BAS can get additional BAC rewards. We will find two ways:
Holding BAC market-making for BAS output;
Pledging BAS for BAC dividend.
This is a self-feedbac resonance.
On the other hand, because BAB=BAC*BAC, when the price of BAC oversold, there will be great arbitrage space. This arbitrage space will curb the decline of BAC. The self-feedback enhancement design like Basis Cash has attracted a lot of speculators.
However, there is an implicit risk. The greater the arbitrage space of BAB, the greater the deficit generated by the system, and the more funds needed later. When the system arbitrage deficit is too large, the system may be the same as ESD that cannot repair itself.
The Davis double-click (kill) effect of all algorithmic stable coins is particularly powerful, and all require a strong consensus to support the positive cycle, or there is a strong financial behaviour to reverse market sentiment. In Basis, we see a banker, Huang Licheng (founder of SWAG/CREAM/MITH). We witnessed that when BAC first crashed to 60DAI, Huang Licheng’s address was crazy buying. At that time, almost everyone in the community thought it was about to collapse, but when the BAC price stabilized, BAC and BAS returned to the pump.
We are not encouraging readers to buy ESD or BAC and BAS now. These projects are full of huge games and risks (also returns). Therefore, we do not intend to share the algorithmic stable coins arbitrage strategy in this article. Years of experience in the cryptocurrency tells us that the crypto world rewards those pioneers. YFI once collapsed, but then 1YFI>1BTC; LEND was once nobody, but it created a 100x glory. No one thought that AMPL could make a comeback in early 2018. Although there are so many fork projects after AMPL, without exception, it has become AMPL’s fuel. Innovation is value, and delivering innovation is also a value.
In the DeFi era of blockchain, funds are more enthusiastic to return these projects that bring real value. We are swimming on the waves of blockchain innovation, and what we can convey is very limited. Don‘t trust, Verify.
Ironically, these so-called algorithmic stable coins have never been stable. But the fact is no one cares. The designers of these algorithmic stable coins did not expect that their mechanism would eventually become our hype tools.
Money never sleeps.