APEX – AI + ASC: The Future of DeFi (1/4)

The Development of and Challenges to ASC

DeFi and cryptocurrencies are inseparable from each other. As DeFi develops and matures, the cryptocurrency industry could experience a new round of growth driven by stablecoins. As a medium of exchange between fiat currency and crypto assets, stablecoins play a critical role in the crypto world. Currently, the market is craving for a way to make “stablecoins” truly stable. Generally speaking, price stability is achievable when there exists a mechanism to deplete the number of a stablecoin when it’s in excess and replenishes it when it’s in short supply. Today, people have invented a new type of stablecoins which use computer algorithms to stabilize supply and demand. This new invention is called algorithmic stablecoin (ASC).

There are three categories of stablecoins: 1. centralized stablecoins backed by fiat currencies, e.g. USDT, USDC, GUSD, PXX, etc. (This type of stablecoins has the most liquidity in the crypto market); 2. decentralized stablecoins backed by cryptocurrencies (over-collateralized), e.g. DAI, sUSD, etc.; 3. decentralized ASC based on DeFi, e.g. AMPL, BAC, ESD, etc.

The Essence of ASC

As its name suggests, ASC is a novel type of stablecoins that utilize algorithms to adjust its supply and demand in the market. When an ASC is worth more than the fiat currency that it is pegged to, the algorithm will increase its supply, and when the ASC is worth less than the fiat currency, the algorithm will reduce supply or rebalance its price through certain market manoeuvres.

Take AMPL for example. To achieve price stability, AMPL has adopted a flexible supply mechanism, adjusting supply based on demand with the help of preset algorithms in its protocol. This is to say that Ampleforth has preset rebase points for price and supply. When the price touches the upper or lower rebase point, a rebase mechanism will trigger to affect the AMPL held by all users. Rebase takes place at 10:00 a.m. (GMT+8), and it takes into consideration the volume-weighted average price (VWAP) of the past 24 hours. When this VWAP is higher than 1.05 USD, the balance in all AMPL user wallets will simultaneously increase. When the VWAP is lower than 0.95 USD, the balance in all AMPL user wallets will simultaneously decrease.

The Limitations of ASC

Similar to the consensus mechanisms of various consensus algorithms, ASC has advantages and limitations. ASC has created an alternative to traditional collateralized stablecoins. It utilizes algorithmic mechanisms to realize the decentralized issuance and circulation of currencies for the DeFi market. This arrangement does away with the inefficient supply-demand balancing of fiat-collateralized stablecoins due to centralization and regulatory troubles, as well as the capital waste that over-collateralized stablecoins necessitates. However, ASC still faces a “stable value paradox”, as the “rationality” of algorithms contends with the “subjectivity” of market capital. On the other hand, if, in order to achieve stability, we artificially peg the price of ASC to fiat currencies at its infancy stage, ASC will lose its natural volatility, and macro-control will get in the way of the free market.

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