Introduction
Last updated
Last updated
Stablecoins have provided the much-needed balance in the crypto space, enhancing core DeFi fundamentals and innovation, and are expected to cross over 400 billion dollars in usage by Dec 2021. Due to explosive DeFi growth past few years, there has been a greater demand for more efficient and high-performing stablecoin protocols. New protocols need to adapt to the ever-changing face of decentralized finance and tear away from their traditional mentality of how a stablecoin should operate and function.
Amongst economic uncertainty and global financial instability, cryptocurrencies have been evolving rapidly. The canyon between fiat and crypto was stark until stablecoins began to bridge the gap. Stablecoins have provided the much-needed stability required for many merchants, global institutions, and countries to participate in the crypto space. Most importantly, stablecoins play a crucial role in enhancing the core DeFi fundamentals and innovation.
The cryptocurrency space has seen an exponential expansion in recent history. In tandem with this growth came the rise of the stablecoin market, which acts as the go-to mechanism for users to access the cryptocurrency supply. In their native form, stablecoins give credibility to a rising and essential use case for blockchain technology to apply monetary policies within a growing ecosystem. The idea of a stablecoin isn’t precisely new when seen in the light of current central banking standards. Various models have come out over the years to offer similar value propositions. The most basic purpose of a stablecoin is to maintain the price stability of another cryptocurrency such as Bitcoin, Ethereum, or Litecoin.
Though stablecoins have revolutionized the world of crypto and provided interoperability, there are always pros and cons. Inflation has been at its peak in the last 40 years, and Stablecoins pegged to FIAT will plummet in value when an economic crisis occurs. Stablecoins aim to reduce volatility but, in doing so, become in part centralized – thus opposing the purpose of crypto.
Theoretically, based on the recent issues with the existing operation models, one must adapt to the following five principles to create a better Algorithmic stable currency.
Optimum Stability
Capital Efficiency
Anti-Bank run Security
Deep Utility & Liquidity
FinTech and Governance Friendly
Though some suitable protocols are doing well in the market, unfortunately, each has its fair share of issues.
Write a captionIn general, stablecoins are categorized into three distinct types - FIAT, CRYPTO, and ALGORITHM BACKED; each has its fair share of issues. Skipping FIAT-backed coins, let's look at the other two categories in some detail.DAI is the first and only highly successful stable coin under the over collateralized stablecoin category but not capital-efficient and with high liquidation risk when the market plummets. Later came the burn-backed model called TERRA LUNA, which solved the liquidation risk. Its success is not with its protocol dynamics but due to the series of innovative DeFi Apps ecosystems leveraging the TERRA platform. Several attempts were made to innovate stable coin dynamics algorithmically - two popular protocols are AMPLEFORTH and Basis Dollar. Unfortunately, both the dynamics failed due to protocol flaws.Recently, a new attempt was made by combining DAI's collateral-backed and TERRA's burn-backed concepts into a new category called FRACTIONAL (FRAX) stable coin. Even though their 1st version failed to withstand price corrections, the upgraded version considerably solved capital efficiency. The main contributing factor to its success lies with its AMO policy, where the protocol autonomously rebalances the collateral ratio to withstand price correction. Additionally, the ecosystem maintains a reasonable treasury balance to support the circulating supply.On the algorithmic innovation front, a new kind of liquidity-owned protocol called Olympus DAO was introduced that combines the Elastic and seignories shares concept solving the stability problem to a greater extent. The vital element of the Olympus DAO protocol is its game theory economics, where the protocol always maintains surplus treasury balance through a novel bonding curve; hence the price of OHM token is always above the $1 peg.Two of the three stablecoin trilemma standards are taken care of by these latest protocols. To make the protocol resistant to economic shocks and more decentralized, by introducing several modifications to the protocol economics, we combined both FRACTIONAL and liquidity-owned dynamics into one called TAU PROTOCOL. Furthermore, A stablecoin protocol can't succeed without proper utility. TAU comes with an integrated DeFi 2.0 swap and liquidation-free loan feature to increase the liquidity economy, further improving its stability. TAU enhanced FRAX's poorly performing governance token with the Olympus DAO game theory fundamentals, thus exponentially increasing stablecoins collateral backing support.
