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As we all know, Satoshi Nakamoto introduced a peer-to-peer electronic cash payment system in the Bitcoin white paper. However, Bitcoin has gradually deviated from Satoshi Nakamoto’s vision in its subsequent development, because Ethereum has Without certain media attributes, it is essentially an application currency, so it is difficult to realize Satoshi Nakamoto’s vision. Although the central bank digital currencies currently launched by various governments have the attributes of blockchain, they are still centralized currencies. Therefore, the algorithmic stablecoin that is most promising to fulfill Satoshi Nakamoto's vision is now. So how does this algorithmic stablecoin work? Let the editor of the currency circle introduce to you how to play the algorithmic stable currency.

 How to play algorithmic stablecoin?

Algorithmic stablecoins, in their purest form, are completely uncollateralized. Their value is not backed by any external assets. Instead, they use algorithms (usually by a computer) with specific instructions or rules to output some result. These algorithms are optimized to incentivize the behavior of market participants and/or manipulate the circulating supply, so the price of any given coin should theoretically stabilize around the peg.

The algorithmic stablecoin system will reduce the token supply if the price falls below the tracked fiat price. This can be achieved through lock-up staking, burning or buyback. If the price exceeds the fiat value, new tokens will flow into the market, reducing the value of the stablecoin.

When the size of the stablecoin reaches a large enough network scale, the price gradually stabilizes, and the increase in market liquidity will reduce the visible arbitrage space. Without the arbitrage space, reflexive transactions have no value, and the market volume will also decrease due to The problem of speculative trading has stalled. The paradox is that in order to achieve long-term market stability, a sufficiently large market value and market recognition are needed. The initial market recognition comes from an arbitrageable environment. When the market environment becomes stronger, arbitrageurs They no longer recognize this market.

Terra is a blockchain protocol that enables stable programmable payments and open financial infrastructure, powered by a basket of fiat-pegged stablecoins that are algorithmically stabilized by its native token, Luna. The Terra blockchain adopts a dual-token model, consisting of Luna tokens (pledged and stable algorithm tokens) and the Terra stablecoin family anchored to legal currencies such as the US dollar and Korean won. A simple summary is: users can mint Terra by burning Luna, or they can send Terra to the system and obtain Luna of equal value.

 Value analysis of algorithmic stablecoins

In fact, the algorithmic stablecoin itself is positioned as a stablecoin experiment in decentralized governance of supply and demand. The original intention of its birth was to solve the problem of centralized governance. Centralized governance stablecoins use prices to control market supply and demand, while algorithms Stablecoins use supply and demand to determine prices. In an ideal state, an algorithmic stablecoin would make a "basket of goods" more consistent with its own market value. The current form is limited to the "perpetual motion machine" of arbitrage, which is obviously impossible to sustain in the long term. Yes, this road still has a long way to go.

Although Basis failed in the short term, the concept of decentralized stablecoin and its idea itself are still very valuable and meaningful. It created a precedent in human history. After that, many innovatively designed algorithm stabilization projects are still there. Basis is not required for success in this track. I believe there will always be someone on this track to achieve true algorithm stability. This is the essence of decentralization.

The above content is a detailed introduction by the editor of the currency circle on how to play algorithmic stable coins. The current algorithmic stablecoins are still in the early stages of development and are not yet able to fully achieve value stability, and may even amplify market fluctuations. Judging from the current development, only a few projects have received sufficient financial support, and most of them are projects on Ethereum. In fact, this algorithmic stablecoin is very dependent on the innovation of the mechanism. Only a sufficiently excellent mechanism can promote the application of algorithmic stablecoin. As ordinary investors, there are still relatively high risks in early participation, so you must invest carefully.