The once-popular algorithmic stablecoin Basis died before birth due to regulatory pressure. After being taken over by an anonymous team, Basis Cash was launched two years later. Meanwhile, alongside this, a wave of new algorithmic stablecoins emerged with the rise of DeFi, including highly sought-after ones like AMPL, YAM, and ESD.
What is a rebase algorithmic stablecoin?
It is an innovative type of stablecoin born in the DeFi world. Its principle is simple: these stablecoins typically have no collateral or real-world economic value backing. Instead, they rely on an elastic rebase mechanism to peg the price to $1. Representative products include AMPL, YAM, ESD, etc.
Taking AMPL as an example, when the fixed rebase cycle is reached, if AMPL > $1, inflation occurs; if AMPL < $1, deflation occurs. This means the number of tokens held by users changes. When the overall value of AMPL is above $1, it dilutes the price by increasing supply. When it is below $1, it indirectly increases value by reducing supply.
However, after some time in the market, it was observed that when the value falls below $1, reducing AMPL's supply simultaneously creates significant panic among holders, leading to intensified selling of AMPL, further deflation, and a vicious cycle—this is the so-called "death spiral."
This model simulates central bank operations, but in reality, central banks have enforcement power, whereas the blockchain world does not. Everyone wants to act like a central bank when issuing money, but no one is willing to reduce their holdings when it's time to pay debts.
ESD (Empty Set Dollar) adjusted the deflation mechanism to a bond mechanism. When the price is above $1, the inflation mechanism remains unchanged. When it is below $1, instead of deflating, it converts the difference into bonds, creating debt. During the next inflation cycle, bonds are prioritized for repayment. This psychologically reduces the likelihood of a death spiral. However, ESD has not been in the market for long, and its stability still needs to be tested.
Therefore, the entire rebase elastic stablecoin concept is still largely experimental. In the short term, it may serve as a speculative tool, but in terms of stability, it falls short compared to other types of stablecoins.
