Economics Design

In our recent research on algo stablecoins, we found some imperfections in some of their mechanisms – namely economic misalignment and failure of coupons. In this episode, we analyze and discuss the impact of such failures.

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How did IRON Finance crash 100% within a day? What went wrong with its mechanisms and economic design, and how is it different from FRAX, which we recently reported to be the best among 8 different stable coins? We dive into the tragedy of IRON in this episode.

Timestamps:

0:00 – Intro & Contents

0:32 – Iron Finance explained

1:13 – IRON vs FRAX

2:43 – Causes of failure: Uncontrolled Supply

4:07 – Causes of failure: TITAN & IRON relationship

4:44 – Causes of failure: TITAN Mechanism Design

7:31 – Three Opinions

9:31 – More resources & how to support us!

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Want more in-depth content?

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4) Check out our new research site & dashboard: https://econteric.com/

5) Newsletter: https://economicsdesign.substack.com/

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An algorithmic stablecoin that is not pegged to $1: How does OHM do it?

What exactly are the inner workings in the OHM ecosystem and how can you take part in it? We explain in this episode!

Timestamps:

0:00 – Introduction to OHM

0:58 – Classifying $OHM stablecoin

1:30 – OHM's Reserve & Algo mechanism

2:06 – No Peg Stablecoin explained

2:59 – Partial Reserve with DAI

3:30 – Zeus: What is $OHM?

4:05 – Stablecoin Creation

4:43 – Stability Mechanism

5:48 – Zeus: OHM Mechanisms

10:09 – Bonding vs Staking

12:19 – What is (3, 3) ?

14:10 – Utility of $OHM Token

15:02 – $OHM vs $BTC

16:39 – Explaining the Premium in OHM and BTC prices

18:25 – Opinion

21:29 – More resources & how to support us!

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5) Newsletter: https://economicsdesign.substack.com/

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If you're Doing Your Own Research (DYOR) on stable crypto coins, this episode explains how to use quantitative and qualitative metrics to analyze them, the 3 types of risks to look at, and how Lisa & our research team applied these concepts to compare 8 different stablecoins in our research report of Apr/May 2021.

The report can be downloaded for free over at econteric.com :)

p.s. Thanks to Fernando for assisting with the audio processing for the episode!

In this week's episode, we talk about FRAX, a fractionalised algorithmic stablecoin. Using the token economics framework that we have explained in other videos, we will analyse the token economics of the $FRAX stablecoin, perform stability analysis on it, and give some opinions about FRAX.

Timestamps:

0:00 – Introduction & Contents

0:36 – What is Frax?

2:38 – Dual-Token Mechanism explained

3:34 – Reserve Mechanism explained

4:36 – How to create $FRAX stablecoin

7:11 – How to Maintain Stability

11:10 – Stability Analysis of FRAX

16:32 – Opinion: Elasticity in Collateral

17:15 – Opinion: backing by USDC

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In line with our recent focus on stablecoins, today we're going to explore the OG onchain stablecoin: MakerDAO. We will dive deeper into the economics of Maker, and understand how the $DAI ecosystem works.

MakerDAO is a novel and innovative protocol that allows for on-chain collateralised borrowing, while also creating a reasonably effective stablecoin. This gives the crypto community an alternative to fiat-backed stablecoins like $USDT. Furthermore, $MKR holders continue to make continual improvements to the protocol, that make MakerDAO better.

MakerDAO is an alternative source of leverage. Because it is an alternative way to gain access to leverage for those who do not wish to custody assets with a centralised exchange. Borrowing from Maker could also be cheaper when stability fees are low.

Any losses incurred by $DAI holders are backstopped implicitly by $MKR holders, who will be diluted in case the system as a whole becomes under-collateralised. This is a major advantage that Maker has versus other lending platforms on the market, where any losses are borne by the lender.

0:00 – Intro & Contents

0:34 – Analysing Maker

2:01 – Maker's Dual-Token Mechanism

3:42 – Maker's Reserve Mechanism

4:35 – Creating $DAI: How it works

6:47 – Maintaining Stability

11:40 – How Maker deals with market crashes

13:07 – Opinion: Maker vs Lending/Borrowing

14:38 – Opinion: Transparency

15:45 – Opinion: Multi-collateral & Past performance

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Stablecoins are no longer what they used to be in 2017, as they have changed a lot from then till today in 2021. To understand how stablecoins are created and to compare different stablecoins, we must know 3 important characteristics: collaterals, mechanisms, and pegs — explained in this episode.

Why do we care about stablecoins? Because finding a mechanism to maintain its peg is the first step towards creating a global currency instrument that is decoupled from the country-based economy.

So, to figure out and experiment this mechanism, we explore the toolkit in #stablecoins. Think of them as the ingredients to the stablecoin recipe, in which you can tweak and play around with. The goal is to find a mechanism to create a stable asset as an output, so we can use this asset to trade and transact with economic agents in other ecosystems. Aka using USD to transact with someone in another country.

Timestamps:

0:00 – Introduction to stablecoins

0:38 – Collaterals, Mechanisms, and Pegs

1:58 – 2017 Stablecoin Mechanisms

3:46 – 2021 Stablecoin Mechanisms

7:21 – Pegs

10:01 – Amount of Collaterals

11:55 – Types of Collaterals

12:39 – How they all work together

14:12 – The future of stablecoins

15:35 – Closing

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Alchemix $ALCX is a no-loss, yield-generating stable coin protocol with unique mechanisms that include real inflation in the ecosystem. In this episode, we speak to the co-founder of Alchemix, take a deep dive into how Alchemix functions, and the financial incentives of being part of the Alchemix system. We then discuss how it differs from other stable coins and what limitations ALCX could have.

Timestamps:

0:00 – Introduction

1:10 – Background of Alchemix

3:04 – What is Alchemix?

4:56 – Stablecoin creation

8:26 – How is stability maintained

18:45 – Incentives and uses of ALCX Token

22:34 – Differences compared to other protocols

26:42 – Opinions and Limitations

31:45 – Ending

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FEI protocol had all of twitter talking last week. 

Backed by significant VCs, this new algorithmic stablecoin mechanism, $FEI, managed to raise US$1 billion worth of Ether within the first 24 hours. And within 24 hours of launch, the price of $FEI dropped significantly, as did $TRIBE, the governance token.   

So what went wrong? How did the economics model and incentive design fail so terribly? And what was the tipping point that caused this massive disaster? Today, we analyse the lessons to learn from $FEI, this new mechanism to create an algorithmic stablecoin.   

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Uniswap is an Automated Market Maker (AMM). It allows users to swap any ERC20 token, using the liquidity pool instead of the order book.

Uniswap is a 100% decentralised and permissionless protocol, operating on the following formula: x*y=k (called “constant product”).   

TLDR: V3 update combines both decentralised market maker model with centralised limit order books.   

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