Interestingly, algorithmic stablecoins emerged as early as 2018, but they weren’t as popular as they are now. Currently, the breakout appeal of algorithmic stablecoins lies in their "volatile prices," which have caught the industry’s attention. The 2020 bull runs led by AMPL, ESD, BASIS, and FRAX have kept the hype around algorithmic stablecoins at an all-time high.
William, Chief Researcher at OKEx Research, analyzed this phenomenon, noting that over the past year, people have discovered they can speculate based on the algorithmic features of these stablecoins to reap high returns. While algorithmic stablecoins are among the most imaginative and disruptive projects to date, the reality falls short of the ideal. Nowadays, people exploit this characteristic of algorithmic stablecoins by continuously driving up their prices, leveraging the algorithm to obtain more newly minted stablecoins and thus securing massive profits. It’s fair to say that in the past year, algorithmic stablecoins have shown a trend of devolving into speculative tools.
Overall, algorithmic stablecoins can be considered one of the most imaginative and disruptive innovations to date. However, relying solely on market sentiment and algorithms for regulation is far from sufficient. The goal of using algorithms to completely offset the price control of centralized institutions is noble, but without sufficient market recognition to maintain price stability, the cold-start model of offering arbitrage opportunities has attracted users primarily seeking early "hyper-profit spirals" rather than genuinely using algorithmic stablecoins as payment or store-of-value tools. If demand for these stablecoins shrinks or a crisis of trust occurs, the algorithmic "bank" will be forced to issue more shares and bonds, which in the future would translate into an increased supply of the stablecoin, leading to a death spiral.
The crypto market celebrates innovation, and algorithmic stablecoins attempt to formulate a monetary policy for an economy. Their level of innovation matches their complexity. On the path to achieving their original purpose, their breakout journey coexists with a significant amount of gaming, speculation, and arbitrage. Perhaps the social experiment of algorithmic stablecoins will require even more time.
