Evolution of Algorithmic Stablecoins into Producers of DeFi Value

A Roadmap Going from Value Creation to Value Innovation with Dynamic Supply

Real markets are driven primarily by three factors at their core: (a) inflation that encourages participation and spending in the ecosystem; (b) trading and arbitrage opportunities; and (c) underlying value of the traded asset derived from use cases. While recent algorithmic stablecoins have inflationary incentives, they lack sufficient arbitrage opportunities as well as use cases. Basis Cash came to the limelight after introducing bonds which made some improvements to the arbitrage opportunities. However, problems still persist and thus Dynamic Supply is seeking to address all of the above.

DST and DSTR are also now listed on CoinGecko

As with Basis and its many forks, when the main stablecoin falls under $1, bonds are issued which can be redeemed at a 1:1 quantity rate for the stablecoins when the stablecoin is back above $1. After witnessing the live market action of algorithmic stablecoins such as Basis for a while now, we have recognized that these innovative systems are plagued with a major issue — Anticipated Value Loss (AVL). This AVL can be attributed to the following problems:

1. Issuance of bonds without use case value creates heavy selling pressure as soon as the bonds are redeemable; consequently the market aligned expectation of this selling pressure discourages buyers to help bring the stablecoin back above $1.
2. Eventually, this vicious cycle leads to a downward spiral and the eventual death of the algorithm, never being able to reach the $1 stable target.
3. Sell pressure from the likes of Basis Shares whales often dictates the price and liquidity of Basis Cash. Consequently, participants are not incentivized to provide liquidity pools if the APY is affected due to such high selling pressure.

To solve the problem of AVL, additional arbitrage opportunities must exist with built-in deflationary mechanics to counteract inflationary mechanics, and create sufficient total market value (i.e., TVL) with minimal slippage and volatility. Such stability through better arbitrage opportunities with steady inflationary growth can therefore lead to new innovations and decentralized services built on top of the market.

We propose the following roadmap that we believe can achieve these objectives:

Stage I: Value Creation

1. The Zapper (2 days) — We will introduce a mechanic that will allow you to convert your unbonded ZAI-DAI UNI-LP tokens into DST-DAI or DSTR-DAI UNI-LP tokens in a single transaction through a user friendly interface. This will help encourage migration away from a potentially dying ecosystem to a new and healthy ecosystem. This also serves as an experiment to test market interest before possibly creating a larger Zapper system.
2. The Burner (~1–2 weeks) — A token burning system that allows one to instantly burn DSTR to gain newly minted DST, and vice versa, under certain market conditions (DSTR is still capped at 250,001). This helps to balance the liquidity pools and even out yields, while introducing market directed deflationary mechanics to counteract reward and inflationary expansion of either token, thereby reducing volatility. Therefore Liquidity Pool participants become better hedged.
3. The Regenerator (~3–4 weeks) — We recognize that if any point max DSTR supply is reached, rewards could dry up and therefore Liquidity Pool providers would lose their incentives. Thus, we need to provide a means to replenish the reward pool quickly at faster rates than any potential DST-to-DSTR Burner actions. To incentivize this, a DST-DAI liquidity pool will be introduced for stakers to receive a portion of newly minted DSTR back into the Reward Pool for farming (again, DSTR is still capped at 250,001).

Stage II: Value Production

This is the exploration and innovation stage for DST use cases in new decentralized on-chain services, with DeFi examples including DEX’s, lending, insurance, mixers, and more. As DST maintains stability through high TVL and arbitrage opportunities, it becomes more viable to use it in a larger, practical ecosystem. We are also exploring other passive incentives for holders of DSTR that contribute to maintaining stability of the market.

A overview of the DST-DSTR DeFi ecosystem

In a traditional market, innovation attracts market participants who subsequently trade off the various representative assets behind such innovations. On the contrary, in DeFi, the underlying tokenomics attracts market participants but often in an unsustainable manner; these tokenomic models should be designed to achieve true stability with incentivized rewards through algorithmic growth (steady inflation) tied to actual use cases.

DeFi is still a new and emerging field, in which tokenomics play a critical role. We will continue to keep an eye on how the markets respond to these tokenomics, thus it is possible we will add or modify the Value Creation mechanics presented in our roadmap. While seemingly a complex system at a glance, once understood it is a rather elegant means to provide various mechanics for market choice to rebalance pools and maintain stability. More details will be shared as we get closer to each mechanic release. Our goal is clear — create stability and sustainability, while innovating to build a self-sustainable ecosystem that is open to, and supportive of, the entire crypto field.

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DISCLAIMER: Dynamic Supply is an experimental DeFi ecosystem in an unregulated cryptocurrency space. Participation in the ecosystem does not constitute an investment and you risk any funds that you participate within the system.