Algorithmic stablecoins make a comeback! Analyzing the star projects Fei, Float, and Reflexer

This article will introduce several algorithmic stablecoin projects that are about to be officially launched, explaining their mechanisms and gameplay in detail.

(This article is authorized to be reprinted from PANews, with the original title "Understanding the Three New Algorithmic Stablecoins Fei, Float, Reflexer" here)

Stablecoins, as the underlying assets of DeFi, have a market value of over $50 billion and are still growing rapidly. As a branch of stablecoins, algorithmic stablecoins are hoped to solve the centralization issues of fiat-collateralized stablecoins and the low capital utilization issues of collateralized stablecoins. However, there have not been very successful projects in this space yet.

Popular algorithmic stablecoin projects from last year like Ampleforth (AMPL), Empty Set Dollar (ESD), Basis Cash (BAC/BAS), Frax (FRAX/FXS) have shown mediocre performance. AMPL has long maintained slightly below $1 and has a small deflation. ESD, due to its large circulation, has a difficult time getting rid of the bubble and has basically returned to zero. Basis Cash's bonds do not expire, making it harder to return to above $1, indicating an imperfect mechanism. FRAX, as it can redeem assets for $1 and integrate with DeFi applications like Curve, but the collateral ratio has not continued to decrease. However, currently, Frax is still one of the most likely algorithmic stablecoins to be applied.

The older generation of algorithmic stablecoin projects that have made no progress are gradually fading from people's view, while many new projects are emerging. This article will introduce several algorithmic stablecoin projects that are about to be officially launched, explaining their mechanisms and gameplay in detail.

Fei Protocol

Fei Protocol has attracted significant attention even before its official launch, with investments from well-known institutions such as A16Z, Framework Ventures, and Coinbase Ventures, which has contributed to good publicity.

Fei Protocol believes that existing DeFi projects using Total Value Locked (TVL) cannot be sustained. They can only achieve high TVL when they offer substantial rewards. With many opportunities in the market, high-yield projects emerge daily, and funds left in projects are disloyal and likely to move to other projects. Examples like the recent popular Alpaca Finance and Big Data Protocol illustrate this point. After large funds exit, the platform token is quickly sold off, prompting further capital flight, creating a vicious cycle.

In contrast, Fei Protocol proposes the Protocol Controlled Value (PCV) model, where assets stored in the contract are directly owned by the protocol. Users cannot withdraw these assets, and the protocol can use them more flexibly to align with its core objectives. Fei Protocol uses these assets to maintain FEI liquidity and achieve price stability for FEI.

Price Stability Mechanism

When the price of FEI remains below $1 for an extended period, anyone can trigger a Re-Weight to restore the price. The protocol withdraws all liquidity, buys FEI back to the re-weight price with the withdrawn ETH, provides liquidity again with the remaining ETH and FEI, and burns the excess FEI.

In addition to protocol-driven operations, there are mechanisms to encourage user behavior to stabilize the price.

When the price is below the re-weight price, selling users incur an additional 4% loss, while buying users receive an additional 2% reward.

Participation Method

The Genesis phase is the best time for users to participate in Fei Protocol to obtain the algorithmic stablecoin FEI and governance token TRIBE.

The Fei Protocol Genesis phase has been extended to March 31, with a minimum price of $0.5 and a maximum of $1.01 through a bonding curve sale. Fei Protocol will also provide a 10% bonus in TRIBE to users purchasing FEI during this phase. ETH deposited by users on the bonding curve will be used entirely to provide liquidity for the Uniswap ETH/FEI trading pair, which belongs to the protocol itself and cannot be withdrawn by users.

To prevent being front-run by "bots" when providing initial liquidity for the FEI-TRIBE trading pair, Fei Protocol allows users to directly exchange the FEI they own from the Genesis allocation for TRIBE in various exchange ratios. These are atomic transactions that accompany the protocol's launch and cannot be front-run by robots.

Participating in Fei Protocol during the Genesis phase is a good choice, albeit with risks. The purchase price may be higher than $1, and selling below the re-weight price incurs a 4% loss. Since the project requires ETH participation, price fluctuations during the settlement process will affect the amount of FEI obtained.

Float Protocol

Unlike Fei Protocol, Float has no funding and was built by a group of anonymous researchers, with a more community-driven token distribution.

Float Protocol believes that during a period of currency expansion, the purchasing power of fiat currencies will erode due to inflation. Anchoring stablecoins to a specific country's fiat currency makes no sense. Float has two tokens: the stablecoin FLOAT and the governance token BANK, which stabilizes value and governs. FLOAT is defined as a low-volatility currency with an initial target price of the golden ratio 1.618, and its price fluctuates based on demand and the need for cryptocurrencies in the treasury. According to official calculations, despite significant ETH price volatility in 2020, FLOAT's target price remains relatively stable.

After two stages of BANK token distribution, the FLOAT token minting begins. The first stage started on February 8, and the second stage started on March 22.

First Stage (Weeks 1-6)

Users who participated in governance could mine BANK by depositing three stablecoins: DAI, USDC, and USDT, with a $10,000 deposit limit per token per address. This method has yielded good results, as BANK tokens have not been sold off, and stablecoin mining profits have doubled so far.

Second Stage (Weeks 7-8)

After the first stage, BANK tokens will be distributed to a broader community. This stage has no whitelist restrictions and will include new non-stablecoin pools. The second stage will also involve BANK-ETH liquidity mining to better discover BANK's value.

Initial FLOAT Minting

After the 8-week BANK distribution, FLOAT minting will begin, allowing users to purchase FLOAT tokens with ETH and incentivizing purchases with 5% of the total BANK supply.

FLOAT Inflation and Deflation

Behind FLOAT is a reserve of treasury assets, and users cannot directly exchange FLOAT for reserve assets from the protocol. In version 1, the treasury only holds ETH. FLOAT inflation and deflation are determined by the Time-Weighted Average Price (TWAP) of FLOAT compared to the target price. If TWAP is higher than the target price, inflation occurs; if TWAP is lower, deflation occurs. The inflation and deflation mechanisms are influenced by the Vault Factor, where Vault Factor = ETH value locked in the treasury / market capitalization of FLOAT at the target price. If Vault Factor > 1, the treasury is in surplus; if Vault Factor < 1, it is in deficit.

During inflation, arbitrageurs pay ETH and BANK at a price higher than the target price but lower than the market price to acquire FLOAT through a Dutch auction. If in surplus, excess above the target price is paid in BANK, consuming more BANK. If in deficit, part is paid in ETH and part in BANK to replenish ETH in the treasury.

During deflation, arbitrageurs sell FLOAT at a price lower than the target but higher than the market price back to the protocol. If in surplus, the protocol pays all in ETH to users, leaving BANK unaffected. If in deficit, the protocol pays with some ETH and newly minted BANK to reduce expenses.

Participation Method

Due to the redeemable collateral in RAI, the risk is relatively low, making it suitable for broader user participation. If RAI can generate high returns, it can be utilized.

After the FLX token is issued, users will receive retroactive rewards starting March 8 for minting RAI and providing Uniswap RAI/ETH liquidity; minting and providing liquidity must be met simultaneously. Currently, the RAI-ETH liquidity pool ranks third on Uniswap.

Reflexer

Reflexer is another project with significant institutional investments from Pantera Capital, Lemniscap, Paradigm, MetaCartel Ventures, Divergence Ventures, Standard Crypto, and The LAO, as well as team members from Compound, a16z, Synthetix, and Aave.

Compared to other algorithmic stablecoins, Reflexer is more similar to MakerDAO. Due to the rapid drop in ETH price on March 12 last year, many vaults in Maker were liquidated. Subsequently, Maker increased collateral diversity by adding assets like WBTC as collateral for DAI. The collateral categories expanded to stablecoins collateralized by fiat currencies, introducing counterparty risk for Maker.

Reflexer aims to create an improved product that can be understood as low-volatility ETH. Like the original DAI, RAI's collateral consists solely of ETH, generated through over-collateralization.

RAI is not pegged to any currency; its initial redemption price starts at pi (3.14) and reduces volatility through a series of parameters. RAI's redemption rate has remained close to 0, reflecting the difference between RAI's redemption price and the market price, keeping RAI's price relatively stable.

Participation Method

Since RAI's collateral assets are redeemable, the risk is relatively low, making it suitable for broader user participation. RAI can be used where it generates high returns.

After the FLX token is issued, users will receive retroactive rewards starting March 8 for minting RAI and providing Uniswap RAI/ETH liquidity; minting and providing liquidity must be met simultaneously. Currently, the RAI-ETH liquidity pool ranks third on Uniswap.

Summary

From the above content, current algorithmic stablecoins tend to include corresponding assets in the treasury to support the stablecoin price. This differs from projects like AMPL, ESD, and BAC, making current algorithmic stablecoin projects more transparent and practical. FLOAT and RAI do not anchor to $1; the former starts at the golden ratio 1.618, and the latter at pi (3.14), representing low-volatility currencies. FEI, while pegged to $1, may deviate significantly, but its mechanism burns 4% if sold below $1 to aid price recovery. Participation barriers in algorithmic stablecoin projects are gradually rising, from initial stablecoin mining to Fei's protocol-controlled funds, where participating funds cannot be redeemed, requiring a deeper understanding of the projects.