While wild price moves on Bitcoin and Ethereum have caught the attention of most traders over the Christmas weekend, a select group of crypto traders are following a real-time experiment that may have implications for the future of stablecoins: setting the fate of Dynamic Dollar.
Dynamic Set Dollar and its DSD token is an algorithmic stablecoin project designed to – ultimately – track the US dollar at a 1-1 ratio with DSD. During expansionary cycles, such as one that drove DSD to $ 3 per token last week, users are rewarded with freshly printed “rebased” tokens for providing liquidity.
However, according to the founder of Avalanche blockchain platform Emin Gün Sirer, developers of protocols like DSD face a much more difficult task during price drops like the one DSD is currently facing: incentivizing users to adjust the number of tokens in circulation. In the case of DSD, holders can burn their tokens for “coupons” at any time that they can redeem anytime within 30 days, as long as the DSD exceeds $ 1 per token – hypothetically allowing them to make significant profits.
“These mechanisms depend on whales jumping in and out of the coin to stabilize the price around its intended target,” Sirer said in an interview with Cointelegraph. And they implicitly assume that the whales share the exact same worldview as the coin’s creators: that the stablecoin must be worth $ 1. But if the whales don’t share this opinion themselves, […] the coins can fail and break their intended pin. “
In a Twitter thread on Saturday, Sirer noted that this disconnect between game theory and developers’ intentions could lead participants to a protocol to identify a Schelling point / price link, but not the one developers had in mind:
To use technical jargon, there may indeed be a Schelling point, but that point could be somewhere other than the designer’s $ 1 intended. Let me illustrate this.
– Emin Gün Sirer (@ el33th4xor) December 27, 2020
Traders act with caution
This erratic dynamic has led other observers, such as Ari Paul, the chief investment officer at BlockTower Capital, to conclude that the project is indistinguishable from a ‘pump and dump’. However, decentralized Finance (DeFi) maven Tyler Reynolds believes that if DSD gets through, it could mean it has established itself as “the next big decentralized stablecoin.”
These just look like a pump and dump to me♂️. Not necessarily because of the design, or because of the team’s fault, but how many Ample’s do we need? Those who are early and early make a lot of money. By the time people buy off influencer tweets, they’re likely to lose 60% + within a month.
– Ari Paul ⛓️ (@AriDavidPaul) December 26, 2020
For Sirer, these kinds of uncertainties are to be expected – and traders should keep them in mind.
“Because the science behind these experiments is not yet well established, there is significant risk and traders must conduct their own research,” he said. “I personally look for three crucial components: applications for the stable currency that go beyond mere speculation; an incentive mechanism that provides realistic, modest returns during periods of stability; and a dedicated, well-capitalized and skilled team behind the medal. “
So far, the market seems to think Dynamic Set Dollar is raising the bar. After hitting as low as $ 0.27 earlier in the day, DSD is on a steady rise and is at $ 0.63 at the time of going to press. In addition, intrepid block explorers have noticed significant on-chain volumes, suggesting that whales are indeed buying and burning DSD for coupons:
– Eden Au (@au_eden) December 27, 2020
Still, Sirer is heating that even if DSD recovers, it could be subject to future downpours.
“Algorithmic stablecoins all contain feedback loops designed to dampen oscillations around the target peg value,” he said. “They seem to do best when they act close to the goal pin and not as well when they deviate. A currency that ends up in dangerous territory and then recovers may well be subject to similar fluctuations in the future. “
Aside from price action and traders’ fortunes, Sirer says these experiments are also key to moving DeFi forward. Sirer points to MakerDAO, Balancer, DyDx and Uniswap as previous algorithmic experiments that have “become really useful tools providing essential functionality.”
And eventually, as the science gets better, projects like DSD will eventually achieve long-term viability, he concluded.
“Algorithmic stablecoins are here to stay.”