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Sounds a lot like the same mechanism that undid the Iron Finance stablecoin [0]: > One IRON token is always redeemable for $1 worth of collateral, which on IRO

Sounds a lot like the same mechanism that undid the Iron Finance stablecoin [0]: > One IRON token is always redeemable for $1 worth of collateral, which on IRON is a mixture of TITAN and the Circle and Coinbase-created stablecoin USDC. [0] https://thedefiant.io/iron-finance-implodes-after-bank-run/ https://thedefiant.io/iron-finance-implodes-after-bank-run/

lalaland1125 4y ago
It's also the same problem that UST had. Algorithmic stablecoins don't work
- yokem55 4y ago
  Undercollateralized algorithmic stablecoins that use their own issued coin as a '1:1' collateral don't work because they depend on ponzi growth to maintain the illusion of it working. Overcollateralized algo stables such as DAI are much more sustainable. They require substatially more of a user's unrelated capital (whitelisted assets not based on the stablecoin's issuing protocol such as eth or wbtc which also have relatively deep liquidity available on the market) to be locked up and held as collateral to mint the stablecoin. And that makes drawing down the supply much smoother when times get rough as folks with their capital locked up will repay their debt on their own or have the market do it for them in a liquidation of locked capital. This repayment is what burns the supply and keeps the stable from falling far below peg. In fact historically, DAI's problem was that it would go way over peg during drawdowns because damand for DAI to stave off or participate in liquidations would push the usd price of dai way up. It is highly capital inefficient model, as it takes roughly at least $1.50 of the other asset to mint $1.00 worth of stablecoin, and users will usually go for a much higher ratio to prevent the liquidation threshold from kicking in. And this capital inefficiency really kneecaps growth since you can't mint anywhere near as much of the stablecoin, but it also means the protocol and thus the stablecoin is much more robust in downturns. Now it still has real risks because the protocol still depends on lively and accurate oracles to watch and report the collateral values, and that liquidations execute properly when collateral values fall enough to trigger them. But those risks are much more manageable compared to the risks undercollateralized stablecoins present.
  - lalaland1125 4y ago
    Yep. DAI is stable, although I wouldn't really call it an algorithmic stablecoin.
    - boc 4y ago
      DAI has been stable because the assets that are used to defend the 1:1 peg have been liquid. In the event of a credit crunch/liquidity freeze, the assets that need to be sold to defend the DAI peg aren't going to have an acceptable buyer, thus breaking the peg and causing DAI to fail. Everyone is thinking way too hard about this. There's no mathematical or economic way to create a parallel US currency that won't break in a credit crisis. It's called the Impossible Trinity [1] because it's empirically impossible to do the following all at once: 1. Setting a fixed currency exchange rate 2. Allowing capital to flow freely with no fixed currency exchange rate agreement 3. Autonomous monetary policy If you do number 1 (set a fixed currency exchange rate, aka 1 DAI : 1 USD), you CANNOT allow for the free flow of capital in and out of your exchange regime. It will eventually break every. single. time. Even if you're a massive sovereign nation, you still can't defend a peg against the Trilemma [2] Crypto investors should understand that they aren't up against ideology here or "haters", they are up against empirical mathematic principles. [1] https://en.wikipedia.org/wiki/Impossible_trinity https://en.wikipedia.org/wiki/Impossible_trinity [2] https://www.thebalance.com/black-wednesday-george-soros-bet-against-britain-1978944 https://www.thebalance.com/black-wednesday-george-soros-bet-...
      - AlexandrB 4y ago
        Interesting, this reminds me of how perpetual motion machines can be dismissed out of hand by citing the 2nd law of thermodynamics. As with plausible-seeming perpetual motion machines, the key to a popular stablecoin seems to be to make it complicated enough that it's difficult to analyze from first principles.
        boc 4y ago
        I think you've hit the nail on the head. Stablecoins exist in the non-crypto world [1] and they all are slaves to the Trilemma - there are trillions at stake if someone could figure out a way around this, but, much like the 2nd law of thermodynamics, you can't make the math work. Crypto doesn't offer a technology solution to this issue since it's not a matter of tech, but rather financial math. If you're a fan of crypto and still reading, here's a hint at the next financial innovation after pegged currencies that you can try to replicate in the cryptoverse: XDR [2] [1] https://en.wikipedia.org/wiki/List_of_circulating_fixed_exchange_rate_currencies https://en.wikipedia.org/wiki/List_of_circulating_fixed_exch... [2] https://en.wikipedia.org/wiki/Special_drawing_rights https://en.wikipedia.org/wiki/Special_drawing_rights

lalaland1125 4y ago

It's also the same problem that UST had. Algorithmic stablecoins don't work

yokem55 4y ago
Undercollateralized algorithmic stablecoins that use their own issued coin as a '1:1' collateral don't work because they depend on ponzi growth to maintain the illusion of it working. Overcollateralized algo stables such as DAI are much more sustainable. They require substatially more of a user's unrelated capital (whitelisted assets not based on the stablecoin's issuing protocol such as eth or wbtc which also have relatively deep liquidity available on the market) to be locked up and held as collateral to mint the stablecoin. And that makes drawing down the supply much smoother when times get rough as folks with their capital locked up will repay their debt on their own or have the market do it for them in a liquidation of locked capital. This repayment is what burns the supply and keeps the stable from falling far below peg. In fact historically, DAI's problem was that it would go way over peg during drawdowns because damand for DAI to stave off or participate in liquidations would push the usd price of dai way up. It is highly capital inefficient model, as it takes roughly at least $1.50 of the other asset to mint $1.00 worth of stablecoin, and users will usually go for a much higher ratio to prevent the liquidation threshold from kicking in. And this capital inefficiency really kneecaps growth since you can't mint anywhere near as much of the stablecoin, but it also means the protocol and thus the stablecoin is much more robust in downturns. Now it still has real risks because the protocol still depends on lively and accurate oracles to watch and report the collateral values, and that liquidations execute properly when collateral values fall enough to trigger them. But those risks are much more manageable compared to the risks undercollateralized stablecoins present.
- lalaland1125 4y ago
  Yep. DAI is stable, although I wouldn't really call it an algorithmic stablecoin.
  - boc 4y ago
    DAI has been stable because the assets that are used to defend the 1:1 peg have been liquid. In the event of a credit crunch/liquidity freeze, the assets that need to be sold to defend the DAI peg aren't going to have an acceptable buyer, thus breaking the peg and causing DAI to fail. Everyone is thinking way too hard about this. There's no mathematical or economic way to create a parallel US currency that won't break in a credit crisis. It's called the Impossible Trinity [1] because it's empirically impossible to do the following all at once: 1. Setting a fixed currency exchange rate 2. Allowing capital to flow freely with no fixed currency exchange rate agreement 3. Autonomous monetary policy If you do number 1 (set a fixed currency exchange rate, aka 1 DAI : 1 USD), you CANNOT allow for the free flow of capital in and out of your exchange regime. It will eventually break every. single. time. Even if you're a massive sovereign nation, you still can't defend a peg against the Trilemma [2] Crypto investors should understand that they aren't up against ideology here or "haters", they are up against empirical mathematic principles. [1] https://en.wikipedia.org/wiki/Impossible_trinity https://en.wikipedia.org/wiki/Impossible_trinity [2] https://www.thebalance.com/black-wednesday-george-soros-bet-against-britain-1978944 https://www.thebalance.com/black-wednesday-george-soros-bet-...
    - AlexandrB 4y ago
      Interesting, this reminds me of how perpetual motion machines can be dismissed out of hand by citing the 2nd law of thermodynamics. As with plausible-seeming perpetual motion machines, the key to a popular stablecoin seems to be to make it complicated enough that it's difficult to analyze from first principles.
      - boc 4y ago
        I think you've hit the nail on the head. Stablecoins exist in the non-crypto world [1] and they all are slaves to the Trilemma - there are trillions at stake if someone could figure out a way around this, but, much like the 2nd law of thermodynamics, you can't make the math work. Crypto doesn't offer a technology solution to this issue since it's not a matter of tech, but rather financial math. If you're a fan of crypto and still reading, here's a hint at the next financial innovation after pegged currencies that you can try to replicate in the cryptoverse: XDR [2] [1] https://en.wikipedia.org/wiki/List_of_circulating_fixed_exchange_rate_currencies https://en.wikipedia.org/wiki/List_of_circulating_fixed_exch... [2] https://en.wikipedia.org/wiki/Special_drawing_rights https://en.wikipedia.org/wiki/Special_drawing_rights