While wild price action on Bitcoin and Ethereum caught the attention of most traders over the Christmas weekend, a select sect of crypto traders is pursuing a real-time experiment that may have an impact on the future of stablecoins: the fate of Dynamic Set Dollar.
Dynamic Set Dollar and its DSD token are an algorithmic stablecoin project designed to track the US dollar at a 1: 1 ratio using DSD. During expansion cycles, such as one where DSD ran up to $ 3 per token last week, users are rewarded with freshly printed “re-based” tokens for providing liquidity.
However, according to Emin Gün Sirer, founder of Avalanche’s blockchain platform, developers of protocols like DSD face a much more difficult task with price dumps like the one that 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 as long as DSD is above $ 1 per token – which, hypothetically, allows them to make a significant profit.
“These mechanisms rely on whales jumping in and out of the coin to stabilize their price around the intended target,” Sirer said in an interview with Cointelegraph. “And they implicitly assume that the whales have exactly the same view of the world as the designers of the coin: that the stable coin should have a value of USD 1. But if the whales don’t share this view themselves […] The coins can fail and break their intended pin. “
In a Twitter thread on Saturday, Sirer noted that this separation between game theory and developer intentions can lead participants in a protocol to identify a Schelling point / price tick, but not the one that developers had in mind:
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 proceed cautiously
This delicate dynamic has led other observers such as Ari Paul, the Chief Investment Officer of BlockTower Capital, to the conclusion that the project is indistinguishable from a “pump and dump”. However, Tyler Reynolds, Maven for Decentralized Finance (DeFi) believes that if DSD catches on, 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 off 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: uses for the stable coin that go beyond speculation; an incentive mechanism that offers realistic, modest returns in phases of stability; and a committed, financially strong and competent team behind the medal. “
So far, the market seems to believe that Dynamic Set Dollar is raising the bar. After hitting a low of $ 0.27 today, DSD has risen steadily to stand at $ 0.63 at press time. In addition, intrepid block researchers have found significant amounts of chains indicating that whales are actually buying and burning DSD for coupons:
$ 789,000 DSD spent on coupons
what a chadhttps: //t.co/aVJan57lgt
– Eden Au (@au_eden) December 27, 2020
Even so, Sirer warns that even if DSD recovers, it could be exposed to future bowel dump dumps.
“Algorithmic stablecoins all contain feedback loops that are designed to dampen vibrations around the targeted cone value,” he said. “They seem to work best when they act near the target and not so well when they part. A coin that turns into dangerous area and then recovers could experience similar fluctuations in the future. “
However, aside from price movements and traders’ fortunes, Sirer said these experiments are also key to moving DeFi forward. 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 gets better, projects like DSD will ultimately achieve long-term viability, he concluded.
“Algorithmic stablecoins are here to stay.”