From Boom to Bust! Can "Algorithmic Stablecoins" Fulfill Bitcoin's Unfinished Ambitions - Peer-to-Peer Electronic Cash

Algorithmic stablecoins are currently not the market focus, making it difficult for them to perform well in the short term, and participation in algorithmic stablecoins carries extremely high risks. Therefore, it is especially important to note that algorithmic stablecoins have the risk of going to zero. If you do not have the risk tolerance, please do not participate.

(This article is authorized to be reprinted from Blue Fox Notes, with the original title "Basis and DeFi Lego". For the original article, please see here.)

There are several reasons why it is important to continue paying attention to algorithmic stablecoins even when they are in a downturn:

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1. Without Algorithmic Stablecoins, DeFi Is Not Truly DeFi

Many people may have only seen DeFi as a speculative tool, but from the perspective of Blue Fox Notes, we see DeFi as a future development trend. From this perspective, DeFi Lego needs the final piece to complete the puzzle, which is algorithmic stablecoins.

Currently, there are many stablecoins in the DeFi space, including fiat-based stablecoins, collateralized stablecoins, hybrid stablecoins combining collateral and algorithms, and elastic stablecoins, but there is still a lack of truly decentralized stablecoins. DeFi needs algorithmic stablecoins to achieve its goals.

In the view of Blue Fox Notes, DeFi is an organic organization that originates from human thoughts and needs, and will ultimately build a mechanism that serves humanity but evolves independently of human will. Its ultimate development does not rely on the will of any individual.

2. Algorithmic Stablecoins Are the Holy Grail of the Crypto Space

As of now, Blue Fox Notes' view on this has never changed. Regardless of whether it is at its peak or in a downturn, whether it is in the spotlight or ignored, this has always been the case. Blue Fox Notes has been focusing on algorithmic stablecoins not because of the rise of Basis, but as early as 2018, Blue Fox Notes has been paying attention and has published related articles such as "Comparison of USDT, BaseCoin, and MakerDAO: Who Will Win?" and "In-depth Analysis of Stablecoin Basis."

From a maturity perspective, BTC > ETH > algorithmic stablecoins, while from a potential perspective, algorithmic stablecoins > ETH > BTC, this view has not changed.

Algorithmic stablecoins are extremely challenging projects, and their success is even more difficult than the initial success of BTC. Even today, the much-anticipated BTC has been pronounced "dead" hundreds of times in history. Of course, it is not a forced comparison to place algorithmic stablecoins on par with BTC, as the success of algorithmic stablecoins has no direct correlation with whether BTC can succeed.

The initial goal of BTC was to become a peer-to-peer electronic payment system, to be digital cash. However, over time, BTC has not achieved its initial goal but has increasingly become a store of value and a medium of exchange, evolving into the "gold" of the digital age. Algorithmic stablecoins may pick up where BTC left off in achieving its original goal. Can algorithmic stablecoins achieve what BTC did not? It remains to be seen, but in terms of difficulty, it surpasses BTC's goal. However, the advantage today is that few believed in BTC initially, while the crypto space now has many supporters.

Because the difficulty coefficient of algorithmic stablecoins is the highest in the crypto space, it is not like lending, not like DEX, not like derivatives; these are all tangible, with visible returns and income support that everyone can understand, so success in these areas is almost inevitable, it's just a matter of which project will succeed.

3. Algorithmic Stablecoins Are an Unprecedented Human Social Practice

Scientific experiments may fail, and social practices may also fail. Social practice is more difficult, with more uncontrollable factors and greater uncertainty. Algorithmic stablecoins cannot be said to have been falsified yet because they have not completed their full journey. But whether they will be falsified in the future is hard to say.

No one can guarantee that algorithmic stablecoins will definitely succeed. Because this is a path that no one in human history has ever walked, it is a narrow gate.

In our view, algorithmic stablecoins will be a continuous pursuit of DeFi, benefiting from the overall growth of the DeFi ecosystem. As long as the DeFi ecosystem reaches a certain level of robustness, algorithmic stablecoins will be integrated into the DeFi system.

4. The Success of Algorithmic Stablecoins Does Not Necessarily Lie with Basis

Although Basis is currently the focus of attention, the ultimate success may not necessarily belong to Basis. Perhaps new algorithmic stablecoins will emerge in the future. But as long as they succeed, it is good for the development of DeFi. Success does not have to hinge on Basis. Blue Fox Notes looks forward to more truly innovative stablecoin practices.

5. Algorithmic Stablecoins Pose Extremely High Risks and Are Not Suitable for Most People to Participate in Early Stages

In the early stages, the stability of algorithmic stablecoins themselves is not supported by actual demand but is essentially based on speculation. Its early stages are highly speculative and inevitably involve significant fluctuations. In this process of fluctuation, it is a zero-sum game, where someone's gains are based on someone else's losses.

Therefore, Blue Fox Notes has always emphasized that if one is not familiar with the mechanism, it is best not to get involved in the early stages. Blue Fox Notes has always stressed that unless one has a deep understanding of the matter, it is best not to participate.

Before the successful practice of algorithmic stablecoins, there will be countless near-death struggles, and the vast majority of algorithmic stablecoin projects will ultimately end in failure, leaving nothing behind.

6. What Does Algorithmic Stablecoins Rely on to Stand Firm?

For algorithmic stablecoins to stand firm, it depends on two factors:

*Sustainability of Demand for Decentralized Stablecoins

Currently, the demand for Basis' stablecoin BAC mainly comes from liquidity mining, that is, earning BAS rewards, but it is not a sustainable process because there is no real source of demand. If it relies solely on this, it is essentially a "perpetual motion machine," which is unsustainable.

To solve this, actual demand for BAC must be increased, a fact that the Basis team naturally recognizes deeply, and they are addressing this issue through short-term, medium-term, and long-term strategies. For more on this, you can refer to Blue Fox Notes' previous article "The Path of Basis' Algorithmic Stablecoin."

In the short term, they are trying to stabilize prices through arbitrage with StabelSwap and incentivizing with BAS; in the medium term, they aim to motivate usage through synthetic assets and savings models; in the long term, they aim to build a stablecoin index through the swap model, breaking away from being anchored to the US dollar.

From Blue Fox Notes' observation, the attempt with synthetic assets is crucial to the success of BAC. It can draw deep inspiration from Synthetix's model, collaborate with protocols like Curve to guide liquidity, and ultimately build a network for the generation and trading of synthetic assets.

Of course, the ultimate evolution depends on the decisions and execution of the project team and community, as well as whether they can fully leverage this window of opportunity for DeFi development.

*Sustainable Development of DeFi

DeFi is the soil for algorithmic stablecoins. Without the fertile soil of DeFi, algorithmic stablecoins cannot succeed. As long as DeFi itself can continue to develop, the practice of algorithmic stablecoins may continue.

Today, the scale of DeFi is still small, but if DeFi exceeds a total market value of trillions of dollars, algorithmic stablecoins will become an essential part of it. Currently, DeFi has USDT, USDC, DAI, and the demand for algorithmic stablecoins is not strong, perhaps even unnecessary. But as DeFi continues to develop, this demand will grow stronger. DeFi is the support for the success of algorithmic stablecoins.