Table of Contents
1. The Current State of Decentralized Stablecoins
2. All About Floating Stables
3. RAI
3.1 An Overview of RAI
3.1 Into the Mechanism of RAI
4. A Study on Similar Concepts
4.1 Float
4.1.1 An Overview Of Float
4.1.2 How the Protocol Works
4.1.3 Utility of BANK Token
5. Data on Floating Stables
5.1 Data on Floating Stables
5.1.1 On Chain Related Data
5.1.2 Social and Funding Data
6. Food For Thought
6.1 OHM
6.2 AMPL
1. The Current State of Decentralized Stablecoins
Recent events like the USDC depeg has made us realized that we are still heavily reliant on the traditional finance system.
In the past years, many have talked about the blockchain scalability trilemma and the issue it faces which birthed many solutions like layer 2 and ZK technology.
But recent incidents have shown that the stablecoin trilemma is something everyone should focus on as stablecoins are the bedrock of DeFi.
The stablecoin trilemma outlines three features needed for a stablecoin to gain global adoption. The features are:
Price Stability - The price needs to be stable so that it can be treated as cash equivalent
Decentralization - It should be decentralized to mitigate centralized single point of failure and risks
Capital Efficiency - High capital efficiency is needed to scale the demand
Currently, none of the stablecoins in the market embodies all three of these features.
$DAI by MakerDAO used to be a stablecoin that is in between price stability and decentralization.
But after multiple incidents and the famed Black Thursday, MakerDAO implemented other price stability strategies like the peg stability module (PSM) that made $DAI less decentralized but stable.
MakerDAO recently passed a proposal where it will move $DAI into the endgame where it plans to make $DAI fully decentralized while sacrificing price stability.
You can read more about the proposal here: https://vote.makerdao.com/polling/Qmbndmkr#poll-detail
2. All About Floating Stables
Floating stables as the name suggests, are a less-volatile asset with no “real” target price. The value of the asset is not pegged to anything, unlike stablecoins which many are pegged to the dollar and would do anything to maintain the peg.
There are many floating stables in the market and one of the most prominent stables is RAI. RAI is recently back in the spotlight because Ethereum founder Vitalik Buterin sent 500 Ether to mint RAI and used it to buy USDC during the USDC depeg.
Previously he also wrote about RAI in a blog and thinks it’s the “ideal type” of a collateralized automated stablecoin, backed by ETH only
3. RAI
3.1 An Overview of RAI
$RAI (Reflex Index) is a decentralized non-pegged stable asset that is solely collateralized by Ether. Unlike typical stablecoins, the value of $RAI in terms of USD is determined by supply and demand where the stabilization aspect of it comes from devaluing or revaluing $RAI.
The mechanism used by Reflexer Protocol is similar to the one used by the old MakerDAO. It dynamically adjusts the circulating supply through its monetary policy.
3.1 Into the Mechanism of RAI
The protocol uses a feedback mechanism called Proportional-Integral-Derivative (PID) controller to periodically output a new redemption price based on changes in the market price.
There are two parties in the Supply-Demand System:
RAI Holders
Safe Users
The main advantage of $RAI is that it allows some degree of volatility which is why it is more resilient to market shocks compared to other collateral-backed stablecoins.
4. A Study on Similar Concepts
Do note that many of these stablecoins have too low, or almost no volume and many seem to have no further development by the team. Please carefully assess the risks before using these stablecoins.
4.1 Float
4.1.1 An Overview Of Float
Basically, Float wants to bring Stability to DeFi, but not through the dollar. It is attempting to change the system by tracking a basket of digital assets, which will not be equivalent to 1 USD. The value would constantly change based on the digital purchasing power.
At the initial mint, FLOAT has an arbitrary price, which will be $1.618, which is the Golden Ratio in Mathematics.
The target price is updated before every auction via the monetary policy contract. The target price only changes if market sentiment and "basket" sentiment are in alignment.
The Basket factor which is the ratio between the value of the assets held in the basket and the value of all the FLOAT in circulation at target price. Before the auction, the ETH-USD feed on Chainlink will be used to calculate the Basket Factor of the Protocol and the New Target Price.
4.1.2 How the Protocol Works
The Float Protocol consists of 3 important tokens currently.
It is important to note that while TWAP Oracles are being used for convenience as they can be created for any token, they are generally less accurate as compared to Chainlink Oracles.
Every period (initially 24 hours), the FLOAT TWAP will be calculated, and if it differs from the Target Price, we do an expansion/contraction of the FLOAT supply as necessary.
4.1.3 Utility of BANK Token
Besides Governance, the BANK Token is also utilized during the auction phase.
5. Data on Floating Stables
5.1 Data on Floating Stables
5.1.1 On Chain Related Data
5.1.2 Social and Funding Data
6. Food For Thought
6.1 OHM
Another similar concept that has been tried before - OHM:
Olympus is a decentralized reserve currency protocol that is governed by a decentralized autonomous organization (DAO). OHM is the protocol’s digital asset-backed free-floating currency.
OHM’s floor price is pegged to DAI. When OHM < DAI, the protocol will buy bonds from the users and start burning OHM to reduce the supply. But when OHM > DAI, the treasury will continuously mint OHM as staking reward and sell them through the bonding process. This essentially creates a flywheel as the situation encourages users to stake OHM to enjoy the high APY and token rewards.
Over time, users started to realise that it is all a big Ponzi scheme that uses new deposits from investors to pay older investors. Many started to withdraw from it and the house of cards came crashing down.
6.2 AMPL
AMPL is similar to an algorithmic stablecoin but is not considered a stablecoin because the value is not pegged to the dollar. The protocol aims to keep AMPL price relatively stable at around the target of $1.15 (CPI adjusted 2019 US dollar) through the use of its elastic supply policy to adjust the supply of the coin.
The elastic supply policy will:
Expand supply if AMPL > Target price
Reduce supply if AMPL < Target price
It expands and contracts the supply every day at 2:00 UTC. AMPL holder will see their wallet balance change in response to the supply adjustment.
The formula for the daily adjustment is (Oracle Price – Target Price) / 10. Using the price on the dashboard, ($1.11 - $1.15) / 10 = -0.04 which means the protocol will contract the supply by 4%.
Stablecoins are an important topic but are floating stablecoins really needed? A common discussion and sentiment is that we should simplify it and most tokens should just go back to being paired with majors like BTC or ETH.
What are your thoughts on Floating Peg Stablecoins, and do you care if you are using a fully decentralized stablecoin?
Feel free to connect with us on our Socials as we would like to hear your thoughts!
