Discussion on algorithmic stablecoins and related ecology

Before we start the discussion, we must keep one word in mind: the current crypto world is rude and barbaric.

My next words will be closely related to this point.

Suppose you, an enthusiast of the crypto world, hold 1 million USDT in your hand, and you try to enter Justin Sun's new project, so you decide to exchange the 1 million USDT in your hand for USDD. You close the deal with ease, in less than a minute, and without any scrutiny.

But in fact, what impact did the deal have?

First, as a more robust universal stable currency in the encrypted world, the replacement of this 1 million USDT has consolidated the credit of USDD from a hidden perspective and strengthened its positive impact on its anchoring.

Second, it diminishes the financial utility of the outside world of crypto. If your 1 million USDT was originally on the Ethereum chain and now cross-chain to the trx chain, Ethereum actually lost 1 million USDT of potential investment funds. You're not sure if your counterparty will re-cross-chain back to Ethereum, but obviously it's a "money out" relative to Ethereum.

Third, as a stable currency pegged to the U.S. dollar, USDT is actually a bond, not an asset like BTC. It shows the debt relationship between TEDA and its holders. However, USDD is not a bond, and TRON is not obliged to implement rigid redemption of your USDD holdings. You can only exchange trx through its mechanism, and such exchange is profitable when USDD < 1 US dollar, and when USDD > 1 US dollar, you do not need to exchange

Therefore, we can see that the essential difference between USDT and USDD lies in the difference in the redemption mechanism. In my opinion, USDT is more similar to the US dollar before the Bretton Woods system, that is, the gold dollar, while the algorithmic stable currency such as USDD is a new thing that has never existed before. USDD cleverly avoids a kind of debt equivalent to the gold dollar currency, that is, rigid redemption. At the same time, it does not belong to the current credit currency.

In this way, algorithmic stablecoins seem to be perfect, but why did UST fail?

After carefully reviewing the rise and collapse of UST, I discovered the fatality of the UST crash: Anchor.

If it's just the interaction mechanism between UST and LUNA, I don't think UST is showing signs of failure in the short to medium term. But obviously, UST is just an ordinary stablecoin at this time, and its output supply is not much higher than that of other ordinary stablecoins, because its application scenarios are not broad.

However, Anchor appeared. The stable annualized interest rate of up to 20% stimulates the giant whales and retail investors in the crypto world. If it were you, what would you choose? Of course, it is to exchange other tokens in hand for LUNA, then to produce UST, and finally to pledge.

Yes, in this way, the price of LUNA is pushed to the top by the wave, and ironically, the vast majority of the UST produced - about 95% - is locked in Anchor.

Have you ever heard of any currency where more than 95% of it is in the bank? No. Unlike LUNA, the concept of UST from the beginning of its design is currency, not token. The value of currency is reflected in the circulation and use. If there is no circulation, it will be a pool of dead water.

The huge influx of hot money has led to a sharp increase in Anchor's cost pressure. When this pressure reaches the limit, the hot money that smells uneasy will naturally withdraw quickly. In the process of evacuation, trampling was inevitable, which led to the severe de-anchoring of the UST.

The seriously de-anchored UST made the arbitrageurs smell blood, and then we saw the emergence of a huge amount of LUNA. A death spiral, a terrible scene.

I learned two lessons from this: stablecoins must be in circulation; high TVL is not necessarily a good thing, and after the tide goes out, naked swimmers will appear.

In the real world, almost all countries strictly regulate foreign exchange and implement sufficient foreign exchange controls. This is because a surge in hot money is very dangerous for a country's financial system. In the encrypted world, an ecology, a public chain, is similar to a country.

The algorithmic stablecoin of the A public chain is very popular. Is this a good thing? This is indeed a good thing, but it has to be a wake-up call: why is it popular? Is it because its value is stable and easy to use, or because it can generate rich interest?

Looking back at UST, a key point of its failure is that you can buy and sell UST at will outside of terra. Similarly, when the hot money in Anchor is evacuated, they can find multiple escape routes with the help of UST. And these USTs will flood outside TERRA and cannot be controlled by the terra ecology.

Well, after analyzing the case of UST, I would like to describe an ecology that I envision, and an algorithmic stablecoin that comes out of it.

There are many applications in the encrypted world, but online shopping and diversified consumption on the Internet are still insufficient. Suppose we build a public chain in the encrypted world, and build an Amazon or Taobao on top of this public chain

We encourage people to shop on this public chain and also encourage people to open small shops on this public chain. At the same time, we encourage financial consumption projects and logistics companies to enter and jointly build a decentralized online shopping world.

This ecology will issue the incentive token CUS, and an algorithmic stable currency CUD linked to CUS. CUD is always equal to $1 in the real world. The output of CUD can only come from burning CUS, and 1 USD of CUS produces 1 CUD. And $1 in CUD can buy $1 in CUS. Note that the former is output and the latter is purchase. In this ecology, output is destruction, but purchase is not.

I produced 1 CUD, which means that 1 USD worth of CUS is permanently destroyed. I used CUD to buy 1 USD of CUS in swap, but I cannot buy CUD in the same swap, I have to go to the official platform to destroy CUS to get CUD.

For swap market makers, under the constant product formula, won't the CUS in the pool be consumed soon? In order to avoid this situation, we provide an effective protection mechanism for market makers, namely daily exchange cap + CUS injection reward + CUD pledge incentive.

The generation of CUS is based on CUD's pledge incentives and market-making incentives. The generation of CUD is based on the combustion of CUS. CUS can be traded across chains and on multiple open markets. And CUD will only be allowed to run on this chain. Neither cross-chain nor external transactions.

Oh yes! I forgot to mention, one of the biggest output channels of CUS, I haven't said it yet. That is - spend to earn。

When you buy bread, clothes, toys, and even cars in this ecological online store, you need to use CUD to pay the seller. And when your payment behavior is generated, you can earn an equal proportion of CUS, which is a reward for your consumption behavior in this ecology, and at the same time, it is also an effective way to reduce your cost of living.

Yes, the original intention of my vision is to think about how to reduce the cost of living for the poor. We cannot ignore these poor people, especially those below the United Nations poverty line. Since the COVID-19 pandemic, the number of people living in extreme poverty around the world has increased by hundreds of millions.

Their lives cannot be ignored. At the same time, they should not be isolated from the crypto world.

“spend to earn”，seems to be simplified to “ConsumerFi”，The concept sounds good and easy to read.

Under such a design, CUD and CUS will not set additional issuance caps. Quite simply, the country's credit currency does not have additional issuance caps, but through macro-control. In this ecology, the regulation of inflation will be based on the mechanism and the response of the DAO organization.

Let’s imagine that a group of speculators finds this ecology profitable. In order to make a profit, they first bought CUS provided by our market maker in the open market, which directly pushed up the price of CUS. They entered the ecology, used CUS to burn and produced CUD, and then pledged or made markets within the ecology, indirectly becoming internal miners of the ecology.

When they want to take profits, they need to replace CUD with CUS within the ecosystem. However, due to the limitation of the daily exchange quota, the CUS in their hands cannot suddenly appear in large quantities in the external market, causing severe market turmoil.

Some people may question: what if someone patiently hoards CUS? Yes, this is a difficult problem. However, if you find that there are giant whales hoarding CUS from the chain, as a CUS holder, what would you think? Let's think about the use of CUS. If it can't be burned inside the ecology to produce CUD, in fact it is useless. Therefore, after discovering that someone has hoarded a large amount of CUS, retail investors will panic and flee, or return to the ecological burning of CUS to mint CUD. For the giant whale, this is precisely what he does not want to see. He does not want his shipping price to be lower than his expectations. To this end, he can only ship as smoothly as possible.

What if the giant whale goes short?

good question! At this point, I will introduce another design of this ecology: the "foundation flywheel strategy".

Looking back on our design, we will find that the production process of CUS and CUD is irreversible. Although both tokens are issued infinitely. But the production of 1 USD of CUD will inevitably burn 1 USD of CUS, and this 1 USD of CUS can no longer enter circulation. Therefore, if someone enters the ecology with 1 dollar, and then keeps on burning CUS-producing CUD-buying CUS-burning CUS-producing CUD. As long as the speed is fast enough, in an infinite time, although the token in his hand is only worth 1 US dollar, he has burned N CUS, which is not counted as the CUS burned as GAS fee.

So although the external market will make CUS fluctuate wildly in the short term. However, the foundation under the DAO organization will implement the "foundation flywheel strategy", and use the CUS in hand to execute the cycle of burning-production-purchasing-burning-production by closely monitoring the data on the chain. This speed is adjustable enough to keep the price of CUS stable for a long time - of course, the foundation does not mind that outsiders also join the cycle if they want to go long CUS.

Alright guys, I seem to have written an article that is too long, I hope I didn't make you impatient.However, if there are attentive guys, you may ask: What does what you said have to do with what you said at the beginning, "The crypto world is savage and rude"?

Yes, in the current encrypted world I know, giant whales are unscrupulous, they manipulate token prices, they take advantage of funds, poor information, influence, etc., they take advantage of the lack of supervision and freedom in the encrypted world, wantonly. Kick open the door of every ecology. They can push an ecology to the throne, or they can throw a project into the abyss. In such reckless behavior, their wealth is increasing, and the poor, poor people are also increasing. The strong gain everything and the weak lose everything. Is this the original intention of the crypto world?

I design an irreversible algorithmic stablecoin, just in the hope that the giant whales will not kick in the door. You can knock on the door and express your desire to come in, and I will greet you with great enthusiasm. When you leave, I will also see you off in person, to prevent your huge body from knocking over those thin people.

In the end, while I could design these literally, I lacked the funds and technology. I would be very happy if someone would like to create such a business with me. I'd be very happy if no one came, but some technical geniuses were inspired.

Everyone is welcome to discuss my designs!