The Rise and Shine of Algorithmic Stablecoins

In 2020, while the world was figuring out how to bake sourdough at home, decentralized finance—or DeFi—was experiencing its own meteoric rise. Among the stars of this crypto show were algorithmic stablecoins like Ampleforth (AMPL), Based, Empty Set Dollar (ESD), and Dynamic Set Dollar (DSD). While the title ‘stablecoin’ implies safety, these digital currencies should be approached with as much caution as crossing a busy street while texting.

Defining the Unstable: What Even Is an Algorithmic Stablecoin?

Ah, stability, that elusive concept! The term ‘algorithmic stablecoin’ is much like a teenager’s definition of ‘clean’—open to interpretation. For MakerDAO, an algorithmic stablecoin employs total supply manipulations to keep things pegged. Meanwhile, teams from Empty Set Dollar and Neutrino believe the mint-and-burn mechanics of Dai earn it a spot in the algorithmic club. Ampleforth’s crew, however, is like that one kid at the party insisting they’re not like the others—refusing to accept that AMPL fits the definition. And then there’s the metrics: ESD’s price peaked at $23.88 and plummeted to $0.174. Just for reference, that’s a dramatic range even the most emotionally dramatic soap opera couldn’t replicate.

Supply Manipulation: The Good, The Bad, and The Ugly

Just when you thought it couldn’t get more chaotic, let’s discuss the supply manipulation tactics that make these tokens as unpredictable as a cat on a hot tin roof. They generally fall into two categories: rebasing coins (like Ampleforth) and coupon-based mint-and-burn coins (like ESD).

Rebasing Royalty

Rebases adjust the entire supply depending on price movements. If Ampleforth is dancing above $1, it increases supply in a way that would make a GameStop trader proud—5% every day if it moves to $1.50! The problem is that this makes nominal price just a snippet of the whole narrative. If you’re holding AMPL, your portfolio balance can feel like a rollercoaster ride, up one minute and down the next—but hey, who doesn’t love a good thrill?

Coupon Chaos

This is where coupon-based coins come in, promising a ticket package of governance and redemption. However, if the coin drifts below $1, you might find yourself in a coupon expiration nightmare. With a serious rug pull potential like that, it’s evident why DSD holders found themselves in a panic when its price plummeted to $0.14, leaving many surprised at their budget planning.

Algorithmic Stablecoins: Our Users’ Reactions

Admit it, your eyebrow just raised. Users are reacting to the instability, and it’s well captured by Manny Rincon-Cruz, who acknowledges that Ampleforth is like one of those investment assets that could send you on either a rise or a fall. You could be hurtling upwards or plummeting faster than your New Year resolutions.

The Future: Can It Get Better?

So what’s next? The ESD team holds a glimmer of hope that algorithmic stablecoins may evolve into something more stable over time. But this seems a bit like saying, “It’ll all work out,” while standing in a burning building. Neutrino USD (USDN), a hybrid stablecoin, has demonstrated milder fluctuations compared to the messier coins, leading to a spark of optimism in this tumultuous world.

Looking back at 2020, it’s worth pondering: Right now, algorithmic stablecoins feel like they were trying to ride the turbulence of a rollercoaster while blindfolded. Can a better algorithm make value stability a reality, or is it just a pipe dream interlaced with the volatile reality of crypto? Only time—or the blockchain—will tell.