In the past several years we’ve witnessed the Cambrian explosion of various synthetic assets on blockchain (first of all, stablecoins):
Despite the difficulties that algorithmic stablecoins faced recently, we believe that stabilization by monetary means is the future. Therefore, we are launching a platform for the creation of synthetic assets, which works on the mechanism of algorithmic price stabilization.
Our first product is synthetic BTC, in the future we plan to add other synthetic assets (XMR, LTC, DOR, etc.). Unlike DIGG (which is based on AMPL model) our approach is less volatile. .
Current synthetic protocols disadvantages
- Custodial stablecoins and synthetics go against decentralized philosophy you need to trust someone who keeps USD in a bank account.
- The CDP model proved its reliability, however it has scalability issues — similarly with currencies pegged by value to the gold and foreign currencies reserve
- Algorithmic stablecoins are deprived of this disadvantage. Stability of the exchange rate is ensured by monetary policy implemented in smart contracts. However, the first experiments showed that stabilization by purely monetary methods is possible, but does not have the necessary sustainability
Despite this, we believe that algorithmic stablecoins are the future and therefore we are launching our experiment.
Our approach, how we differ
Our goal — optimization of stabilization mechanisms implemented by Basis Cash.
According to the model, it is possible to achieve the $1 target value of the token by implementing a mechanism for controlling the money supply by buying or selling bonds.
However, the rapid growth of the money supply caused by active liquidity mining leads to an imbalance in the system: the growth of the bond market volume does not keep pace with the growth of the money supply. When the price deviates down from the peg — the required number of arbitrageurs ready to buy the bonds is not found.
Liquidity mining turns out to be a tool that gives adoption to a new token, but it also plunges it into a “resource curse” that destroys the price stabilization mechanism.
In the real sector we will see similar examples in resource economies (for example, oil exporting countries): in the event of an increase in the price of oil, these economies receive huge profits. However, these profits do not lead to economic growth, but, on the contrary, destroy domestic non-resource sectors of the economy and lead to inflation and devaluation of the domestic currency. The economy cannot utilize “extra money”. Nevertheless, a way out of this has long been found — the creation of a stabilization fund that stores “petrodollars”, preventing them from accelerating inflation and which can be spent in case of crises (Norway’s oil fund, reserve fund in Saudi Arabia, UAE, Russia etc.).
We propose to implement such a structure — a stabilization fund, which absorbs assets at the time of active growth of the money supply at the time of active farming phase and which can further use these assets to maintain the exchange rate at the time of contraction after the end of farming.
Stabilization fund design
Stabilization fund is a smart contract with 2 functions:
- Selling the base asset for the underlying asset and storing this asset
- Selling the underlying asset for base asset
Stabilization fund is limited by these 2 functions and can’t perform any other actions.
Peg > 1 BTC (XMR, LTC, DOT etc.)
- During the farming period — additional tokens are issued, which balances the price, the funds are stored in the stabilization fund
- After farming period — additional issuance is distributed among holders depending on their share
Peg < 1 BTC (XMR, LTC, DOT etc.)
- Bonds issuance
- If the bond mechanism does not cover the gap, a stabilization fund is used
Stabilization fund will make the system more sustainable in comparison with other projects by reducing the effect of post-farming dumping.