“Stablecoin experimentation is happening in real-time with billions of
dollars at stake in this vast permissionless lab we call DeFi,” reads a
new research report from ShapeShift. The author focuses on the rise of
algorithmic stablecoins and their potential use cases.
Promising innovations in DeFi have given rise to a new breed of
stablecoins that have the potential to reduce volatility and promote
greater decentralization, according to a new research report from
ShapeShift.
In its latest New Frontiers research study,
ShapeShift explores the recent growth of “algorithmic stablecoins,”
which are cryptocurrencies that automatically adjust an asset’s supply
and other important parameters to reduce volatility. In his analysis,
author Kent Barton, who heads research and development at ShapeShift,
focuses on three assets: RAI, FRAX and FEI.
Related: ShapeShift to decentralize entire company, plans for largest airdrop in history
Barton summarizes the potential value proposition of algorithmic stablecoins as follows:
“The
basic notion here is that if a stablecoin protocol has the ability to
automatically manage supply by minting and burning assets in response to
market conditions, it can ensure that the asset remains close to its
peg. This can lead to less reliance on governance, as well as lower
collateralization requirements.”
The author explains that
algo-based stablecoins differ from their fiat-backed and
crypto-collateralized counterparts, but also noted that algorithmic and
crypto-collateralized variants aren’t necessarily mutually exclusive.
These stablecoins “are collateralized to a certain extent, but also
feature in-protocol mechanisms to manage supply and reduce volatility,”
he said.
Related: ShapeShift report calls ‘staking derivatives’ a potential win-win for PoS users
RAI,
FRAX and FEI have all received various levels of support from the
crypto community, though FEI is the largest of the three in terms of
market capitalization at roughly $350 million. By comparison, FRAX has a
total market value of $245 million, whereas RAI is valued at roughly
$28 million, according to Coingecko data.
RAI follows a
“redemption price” protocol that targets secondary-market sales, which
allows it to maintain stability over time versus the underlying
ETH-based asset. Barton says RAI is a more suitable option for traders
as opposed to long-term investors.
FRAX is collateralized by
USDC, though its total backing is always less than the supply of FRAX.
That makes it under-collateralized and the stability mechanism is
supported by using USDC as opposed to ETH.
FEI differs markedly
from these projects by using a bonding curve that sells FEI for ETH.
Wealth entering the system is locked in something called Protocol
Controlled Value, which is used to maintain the peg through liquidity
management on exchanges.
Related: Fei Protocol genesis locks up $1 billion in ETH, but LPs could face losses
Barton
concludes by stating that algorithmic stablecoins are still in their
early stages, which means their success is far from guaranteed.
Nevertheless, this emerging asset class is unique for its regulatory
profile, potentially positive impact on DeFi and ability to facilitate
niche use cases.
source link : https://cointelegraph.com/news/algorithmic-stablecoins-show-promise-of-reducing-volatility-shapeshift
