The pursuit of the ideal algorithmic stable currency by the market and the community continues.
AMPL was pushed to the forefront again because of Aaves proposal.
On July 4th, AMPL broke through $1.042 and entered the stage of additional issuance. Previously, since May 13, 2021, AMPL has been in a state of deflation for a long time. During this time, the supply of AMPL has shrunk from 498 million to 182 million, and its market cap has dropped from $413 million to $171 million.
Subsequently, on July 20, the Aave community initiated the AIP 12 proposal, proposing to support the algorithmic stablecoin AMPL. AMPL once again drives algorithmic stablecoins to attract market attention. Soon, the proposal was passed and AMPL became the first rebase asset on the lending platform.
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AMPL is adjusting
Affected by the news that AAVE supports AMPL lending, the short-term supply and demand of AMPL in the market has changed significantly. The currency price rose rapidly from 1.1 U when the proposal was passed to around 2.3 U, and the impact of the news was immediate. In addition to the price increase, based on the 24-hour weighted price calculation, the single inflation rate of Rabase is 6%, and the short-term income growth rate of AMPL holders at that time was extremely fast.
Aave, the leading decentralized lending platform, has always been cautious in the selection of supported assets. Although it is not yet possible to mortgage AMPL to borrow other assets, the community still generally believes that this is an important development for AMPL.
According to the rules, AMPL is inflated when it is higher than $1, and deflated when the price is lower than $1, which will amplify market volatility to some extent. Due to the particularity of rebase, the AMPL loan method is also different from general currencies. There will be no rebase when borrowing AMPL in Aave, and the borrower needs to pay an annualized interest of 48% to enjoy inflationary benefits. This method makes the risk of the borrower relatively controllable, and also allows AMPL to be used as a relatively stable asset.
However, in this method, the highest borrowing rate on Aave is limited to below 48% (0.13% daily interest rate). However, the rebase of AMPL can reach 7% or even higher in one day, which may cause the lender’s interests to be unbalanced: when AMPL is higher than $1, the asset utilization rate of AMPL is always close to 100%. In this way, depositors can neither obtain inflationary income nor redeem their own assets, while the annualized return on deposits of AMPL on the Aave platform is 38.4%.
At present, Brandon, the eye-catching founder, is proposing a dynamic adjustment of the interest rate on Aave, and seeking AMPLs variable interest rate to compensate for the loss of depositors through interest, so as to rebalance the incentives between borrowers and lenders.
According to the current official information, the new model intends to use 75% as the optimal utilization rate of assets. At this time, the annualized interest that the lender needs to pay is 2%. When the asset utilization rate rises to 100%, the annualized interest on loans will be as high as 10002%. The new model could cover depositor losses through interest and rebalance incentives between lenders and borrowers.
In this way, AMPL still needs time to prove itself.
AMPLs new move has brought back attention to the already silent algorithmic stablecoin sector. Some people believe that in recent months, various countries and regions have gradually tightened the regulation of stablecoins. This time point may become an excellent time for the development of purely algorithmic, highly decentralized stablecoins, and in the market conditions Instability demonstrates the advantages of algorithmic stablecoins.
Regulators in regions such as the United States are paying increased attention to stablecoins. Federal Reserve Chairman Powell has repeatedly stated in public channels that stablecoin regulation needs to be introduced as soon as possible. It has publicly stated that the current stablecoin lacks a clear regulatory framework, and that stablecoins should be regulated in a manner similar to bank deposits and money market funds.
The systemic role played by stablecoins in cryptocurrency transactions and lending has made regulators and investors begin to pay attention to the risks from regulation.
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Algorithmic Stablecoins: Attempts and Breakthroughs
Looking back at the current algorithmic stablecoin market, we can see many new changes and trends.
The first-generation algorithmic stablecoin AMPL is a typical single-currency system. After AMPL, the algorithmic stable currency represented by ESD soon appeared, which introduced the bond game mode and transferred the fluctuation to the bond. On the basis of not breaking away from the single currency model, the algorithm and anchor assets of the stablecoin have been adjusted, and it has entered the stage of simulating the issuance of bonds by the Federal Reserve.
The emergence of Basis has allowed the community to enter the multi-coin model of algorithmic stable coins. Basis imitated the modern central banks system of regulating the supply of base money and issued three types of tokens: Basis Cash (BAC), Basis Bond (BAB) and Basis Share (BAS). Token, these three types of tokens correspond to US dollars, bonds, and stocks respectively, increasing the richness in the system. Compared with the first-generation algorithmic stable currency, the multi-currency model aims to increase the stability of the system. This design was once highly recognized by the community. However, Basis has been falling since its launch in January this year, and the current price has dropped to $0.08, which is far from achieving the goal of algorithm stability. The community has questioned the model relationship between the three currencies.
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(Data source: coinmarketcap)
It can be seen that this model introduces some mortgage assets, and the algorithm dynamically adjusts the model details to improve the stability of the entire system. According to the Q2 DeFi industry report released by TokenInsight, UST and FRAX have the lowest volatility, with an average deviation of less than 0.2%.
In the market, problems with algorithmic stablecoins have also emerged one after another. ESD and BAC were pegged to $1, but they were completely detached from the anchor in the second quarter; AMPL, which has always been pegged to the exchange rate, has become one of several mainstream algorithmic stablecoins. most volatile. The more optimistic phenomenon is that the price of FRAX has been stable at $1 for a long time. The arbitrage mechanism has effectively helped FRAX achieve price anchoring, and there are very few positive and negative premiums of more than 1%.
So far, algorithmic stablecoin projects have been based on the mortgage model of digital currency, and have carried out various innovations around the mortgage rate, from ESD with zero mortgage, to FRAX with dynamic mortgage, and the subsequent FEI with over-collateralization. These attempts are to balance the mortgage rate and risk, but it is difficult to balance.
In addition, the relatively new stablecoins FLOAT and RAI did not choose to anchor to 1 US dollar. The former starts from the golden ratio of 1.618, and the latter starts from the ratio of pi (π), which is also regarded as a currency with low volatility. This also shows that there may be new opportunities for non-dollar stablecoins, and algorithmic stablecoins are still in the stage of experimentation and exploration.
How algorithmic stablecoins balance and play between market size and price stability is the biggest focus of the market and community on algorithmic stablecoins. Since the development of algorithmic stablecoins, the ideas of various projects have become more conservative. What the market and the community need more is the stability of algorithmic stablecoins. In any case, among the three major sectors of lending, mortgage, and stable currency, DeFi has shown great charm in the first two sectors, and the development of the stable currency sector is still considered to have a huge space. Stablecoins still hold too much expectation.
