While the wild price movement in Bitcoin and Ethereum caught the attention of most traders over the Christmas weekend, a select sect of cryptocurrency traders are following a real-time experiment that could have implications for the future. of stablecoins: the fate of dynamic set dollars.
Dynamic Set Dollar and its DSD token are an algorithmic stablecoin project that aims to track the US dollar with DSD in a 1-1 ratio. During boom cycles, like the one that saw DSD rise to $ 3 per token last week, users are rewarded with freshly printed “Toped” tokens for providing liquidity.
According to the founder of the blockchain platform Avalanche, Emin Gün Sirer, Protocol developers like DSD are faced with a much more complicated task with price downloads like the one DSD is currently experiencing: incentivizing users to adjust the number of tokens in circulation. In the case of DSD, holders can burn their tokens at any time for “vouchers” that they can redeem at any time within 30 days, provided that DSD is above $ 1 per token, which can hypothetically benefit them.
“These mechanisms rely on the whales getting in and out of the coin to stabilize their price around the intended destination,” Sirer said in an interview with Cointelegraph. “And they implicitly assume that whales have exactly the same view of the world as the coin designers: that the stable coin should have a value of USD 1. But if the whales don’t share this point of view […] Coins can fail and break their intended anchor. “
In a Twitter thread on Saturday, Sirer noted that this separation between game theory and developer intentions can lead to participants in a protocol identifying a Schelling price / point parity, but not the one the developers had. in the head:
To use technical jargon, while there may be a Schelling point, that point may be in a different location than the $ 1 intended by the designer. Let me illustrate.
– Emin Gün Sirer (@ el33th4xor) December 27, 2020
Traders are careful
This dangerous dynamic has led other observers like Ari Paul, Chief Investment Officer at BlockTower Capital, to conclude that the project is indistinguishable from a “pump and dump”. However, decentralized finance (DeFi) expert Tyler Reynolds believes that if DSD is ahead, it could mean it has established itself as “the next big decentralized stable coin”.
These just look like pumps and dumps to me. Not necessarily intentional or the team’s fault, but how many amples do we need? Those who get on early and get off early make a lot of money. When people buy out influencer tweets, they are likely to lose more than 60% within a month.
– Ari Paul @ (@AriDavidPaul) December 26, 2020
Such uncertainties are to be expected for Sirer and traders must take them into account.
“Since the science behind these experiments is not yet well established, there is significant risk and traders will have to do their own research,” he said. “Personally, I’m looking for three critical components: use of stablecoin beyond mere speculation; an incentive mechanism that offers modest and realistic returns in phases of stability; and a committed, financially strong and competent team behind the medal. “
Until now, The market seems to believe that Dynamic Set Dollar is above the bar. After hitting a low of $ 0.27 earlier today, the DSD rose steadily to $ 0.63 at press time.. Additionally, intrepid block researchers have found significant amounts up the chain suggesting that whales are buying and burning DSD for coupons:
789k $ DSD issued for vouchers
what a chadhttps: //t.co/aVJan57lgt
– Eden Au (@au_eden) December 27, 2020
However, Sirer warns that even if DSD recovers, it could be subject to strong sales going forward.
“Algorithmic stablecoins contain feedback loops designed to dampen fluctuations around the target parity value,” he said. “They seem to perform better when they are close to target parity, and not as well when they are different. A currency that turns into dangerous territory and then recovers could well be subject to similar fluctuations in the future. “
However, Aside from price movements and traders’ fortunes, these experiments are also key to moving DeFi forward, according to Sirer. Sirer points to MakerDAO, Balancer, DyDx, and Uniswap as earlier algorithmic experiments that have become “really useful tools with critical functionality”.
And in the end, as science improves, projects like DSD will ultimately achieve long-term viability, he concluded.
“Algorithmic stablecoins are here to stay.”