Gyroscope: A new algorithmic stablecoin with its own reserve pool

Original title: "DeFi New Game 丨 One article to understand Gyroscope, a new algorithmic stablecoin with a reserve pool"< /blockquote>

Original source: Babbitt

On February 23, the algorithmic stable currency project Gyroscope Protocol announced its launch alpha testnet.

Gyroscope (gyroscope) is a new stable currency design, similar to the gyroscope in reality, which remains stable as the surrounding environment changes.

Gyroscope will experience "friction" if assets in the reserve lose value and users exchange Gyroo Dollars for the underlying reserve asset. Using or depleting the reserve will make the stablecoin "unstable", just like a gyroscope in reality, the speed of the rotating disk slows down and the stability decreases. But crucially, just like the gyroscope in reality can be recharged to restore rotation speed, Gyroscope can increase reserves through high reserve yield and inflow of stable coins to restore stability.

Gyroscope Mechanism Introduction

Gyroscope Reserve is an all-weather portfolio that not only diversifies Price risk, but also diversifies counterparty, censorship and regulatory risks. Doing so preserves the original value proposition of DeFi.

Gyroscope needs more than reserves. It uses a closed arbitrage loop on the upside: if the price is higher than the peg, more stablecoins can be minted and sold on the market, with the proceeds going to the reserve.

If the price falls below the peg, things get more complicated. Gyroscope employs a similar, but further controlled arbitrage loop to support pegs.

If the reserve value satisfies 100% of the stablecoin supply (which it should in most cases), then this arbitrage loop is infinite. Stablecoins can be purchased on the market and redeemed for $1 worth of reserve assets.

Incentives between users and speculators support the peg if the reserve value is less than 100% of the stablecoin supply.

Economic design to protect the peg

Gyroscope is designed to prevent Speculative attacks on fixed exchange rates.

First, in times of crisis, it is in the user's interest to wait for redemption rather than sell for less than face value. By waiting, users will get a more favorable exchange rate. In turn, this makes any speculative attack less profitable.

The core of this design is an economic game.

Users form beliefs about the fundamental value of stablecoins. These beliefs are based on the value of the reserves and the level of acceptance and usage of stablecoins. But what other market participants (among others) think can also influence users' beliefs. Gyroscope harmonizes these beliefs. Since the value of the reserve fund can be observed on the chain, and the governance rules on how to use the reserve fund are also transparent and clear, rational users can easily make a decision to maintain the anchor or break the anchor, because they can only stand on the side of the majority. will win.

Eventually, with a sufficiently large reserve and sufficient stablecoin acceptance, the value of the stablecoin will stabilize at $1 under broad market conditions. While the peg may break in extreme cases, by design the reserve is difficult to deplete in the short to medium term, and as long as the cryptocurrency ecosystem can recover, the reserve will eventually recover.

The Problem with Other Stablecoins

Unlike existing non-custodial stablecoins, Gyroscope Stability does not depend on the need for leverage.

Let's take Dai as an example. The stability of Dai depends on a mechanism to balance leveraged demand and demand for Dai, and a liquidation market for demand. The main downside of this approach is that such stablecoins can enter a death trap when liquidity or the need for leverage dries up, as in 312. Additionally, as Dai has grown, it has become increasingly reliant on exchangeability with USDC, which explains its relative stability of late.

Let's talk about managed stablecoins (such as USDC), which will face the risk of being shut down. Transfers may be suspended and users can only convert stablecoins to fiat through specific banks/jurisdictions, which may not be available to all users.

There are other stablecoin designs, such as Basis Cash and Empty Set Dollar (also formerly NuBits), which rely on speculators continuing to bet on the currency supply Continued growth. Additionally, these protocols distribute all proceeds from the new issuance to other speculators.

Features of Gyroscope

In practice, it is difficult for us to replicate and maintain on-chain anchoring functions of the central bank. Maintaining a peg usually requires a country's financial and soft power resources. Such resources do not exist in DeFi, and the available toolkits are smaller. While several attempts have been made to achieve this goal, these attempts have not solved the centralization design challenge.

There are two main challenges in maintaining a peg on-chain. First of all, assets anchored to stablecoins (such as U.S. dollars) cannot be held directly on the chain. U.S. dollars can be reserved by central banks, and the reserve assets available in DeFi have a higher risk. Second, due to the transparent, programmable, and pseudo-anonymous nature of the blockchain, speculative attacks on the peg can be carried out quickly, potentially destabilizing the currency quickly.

Gyroscope addresses the first problem by designing reserves so that risks within the reserves are carefully stratified. Gyroscope addresses the second problem with a new AMM design. For more information, see the whitepaper‌.

Why the world needs non-custodial stablecoins

We expect that, in addition to speculative uses, There are also two main user groups that can benefit from Gyroscope.

First, crypto-native businesses will be able to use Gyroscope for treasury management without having to rely entirely on banking infrastructure or other stablecoins with centralization risks.

Secondly, an unregulated, censorship-free stablecoin would be useful for households in unstable markets and geographic regions. It provides a means of storing value, provides a savings option, reduces the likelihood of significant depreciation, and avoids government restrictions on capital movement or government forfeiture measures.

Project progress

Gyroscope will develop a fully functional version of Gyroscope V1 for the mainnet Review and will be published in the next few months.

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