Brief Introduction to the Development of Algorithmic Stablecoin and Infrastructure
Head of Economic Research @CrypTokamak
As the infrastructure of the crypto world, stablecoins increased significantly with the market development and the rise of Dapps. At 29th December, 2021, major stablecoins hit its peak of market cap, $78.2 billion for USDT, $42.1 billion for USDC, $14.6 billion for BUSD, $10.1 billion for UST, $9.3 billion for DAI, $1.7 billion for FRAX, $1.3 billion for TUSD and $0.9 billion for USDP, of which the total value was $158.2 billion, 471% higher than that in 2020.
Centralized stablecoins still keep their dominance, accounting for over 85% in market cap, but their risks were uncovered by a series of issues about compliance and asset transparency. People started to explore the solutions. Over-collateralized stablecoins like MakerDao opened up an effective way for decentralized stablecoins but with the problem of inefficiency. Its growth is limited by the market value of the collateral. Therefore, new solutions of algorithmic stablecoins like UST, Frax, Fei, etc. came out.
The market cap of UST reached $11.22 billion, exceeding the circulation of DAI. It had increased by 300% over the two months since November. There was no doubt that algorithmic stablecoin was booming and showed the efficient capital utilization and high growth.
Although with such a promising future, algorithmic stablecoin is still limited by the lack of infrastructure. Each project has to build their own applications to empower stablecoin and increase utilization by providing their own tokens as subsidy, causing a constant selling pressure to token price. So as of now, hardly can a project survive in this stablecoin war. Take UST and MIM as examples.
Luna ecosystem empowers UST by developing new projects. Anchor, the lending platform on Luna, kept UST utilization by providing high token subsidies in lending UST to encourage UST holders to participate in Anchor. Every project in Luna ecosystem sacrificed to support UST and would eventually hinder the development of the whole ecosystem. Anchor’s token price dropped continuously since its launch. The price had decreased by 80.2% compared to its peak.
Abracadabra originally utilized interest-bearing tokens as collateral to mint a USD-pegged stablecoin MIM, fully increasing the capital utilization. And the milestone for MIM was to catch the liquidity incentive campaign of Curve by providing high CRV token rewards as the subsidy in MIM pool through massive CRV votes gained at the early stage. Users would increase MIM utilization for the subsidy.
It can be learnt from these cases that successful stablecoin ecosystems met two requirements — high subsidy and application scenario. It would be hard to start from scratch if they had no other sacrificial supporters or such chances as CRV liquidity incentive. At the same time, if projects launched liquidity incentive as the subsidy only, they would face a major sell-off of the token and a sharp drop in price in the future.
The market of algorithmic stablecoin was less stable than that of major stablecoin, which meant the former holders gained higher APY. Take UST as an example, Anchor kept the interest of 19.5% with the subsidy system, without which stablecoin utilization would be hard to develop.
Amara Finance — Building LP Lending Platform and Algorithmic Stablecoin Infrastructure
To deal with the lack of application scenario for algorithmic stablecoin, Amara will build a brand new LP lending market where LP will be used as collateral to lend algorithmic stablecoin. The application of LP at present is for yield farming only, so the utilization rate is very low. At Amara, users can deposit their LP into Amara lending platform to borrow algorithmic stablecoin supported by Amara with no bearing on the benefit from yield farming.
In the major lending protocol, there are few chances to collateralize LP due to its high risk. Half of LPs supported by Amara are major stablecoins, cutting the asset volatility in half and partly dealing with the risk of price volatility. At the same time, users can borrow the algorithmic stablecoin that shares almost the same risks with LP, which will avoid a certain risk of doing evil. The APY of LP yield farming is always over 100%, so higher interest won’t affect the lending rate of stablecoin.
The critical problem decentralized stablecoin has to face is that before the establishment of a strong community consensus, protocol controlled assets may shrink significantly when entering a bear market. Negative premium will happen to stablecoin due to the panic. LUSD once reached the top of $1.07, but dropped quickly back to ±3%. Fei went through unpegging due to the imbalance of demand and supply caused by the lack of scenario. Assets under its protocol shrinked immediately from $2.4 billion at the very beginning to $0.5 billion. For decentralized stablecoin, the risk of continuous negative premium is much higher than that of continuous positive premium.
It is a tough issue for any stablecoin project, and Amara LP lending market will provide a large demand for stablecoin issuers. Users who borrow stablecoin from Amara can avoid risks through real-time swap to major stablecoins such as USDT. As it is mentioned before, the risk of continuous negative premium is much higher than that of continuous positive premium. If a negative premium happens to algorithmic stablecoin, users who have deposited LP can gain arbitrage by repurchasing LP. A negative premium won’t increase liquidity risk, but decrease the debt ratio.
Suppose that Steve had $100 MARA-USDT LP. He could gain 100% APY by yield farming. But now he could gain 120% compound APY by depositing LP into Amara platform and borrow $50 algorithmic stablecoin (eg. UST). Steve could avoid risks by investing other tokens or swapping to USDT. If the UST price dropped to $0.94, he could repurchase UST with $47, pay off the debt and gain 6% interest.
Amara targets LP liquidity and algorithmic stablecoin market, increasing LP utilization and providing application scenario for stablecoin. Amara will push forward the development of stablecoin market by partnering with more algorithmic stablecoin projects in the future.
Reference：
- https://dune.xyz/hagaetc/stablecoins
- https://amara-finance.medium.com/amara-finance-a-new-chapter-of-defi-2-0-lp-based-liquidity-release-solution-529323e0de2
- https://blog.csdn.net/m0_60517769/article/details/121381015
- https://www.footprint.network/guest/dashboard/0b7f2238-c866-4df6-b6fc-1307ed095d85/stablecoin-dashboard#secret=9B5ADC9674B89DB199FFD76A21077EB2
- https://www.beekuaibao.com/article/927295721148952576
About Amara Finance
Amara Finance is a cross-chain financial aggregator for NextDeFi aiming to be the DeFi collaboration center to bridge Polkadot and the off-DOT world. Amara’s core products include: AmaraLend, a multi-chain deployed lending protocol focusing on long-tail assets; AmaraLink, a multisig cross-chain bridge connecting Polkadot and off-DOT world; AmaraPay, an aggregated payment gateway protocol responding swiftly across the world.
Follow Us
Webiste：https://www.amara.link/
Discord：https://discord.com/invite/rhkyBmmCBf
Telegram：https://t.me/AmaraFinance
Twitter：https://twitter.com/AmaraFinance
Medium：https://amara-finance.medium.com
E-mail：amarafoundation@amara.finance
