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According to a new research report by ShapeShift, the promising innovation of DeFi has spawned a new type of stablecoin that has the potential to reduce volatility and promote greater decentralization.
In its latest New frontier In a study, ShapeShift explored the recent growth of “algorithmic stablecoins,” which are cryptocurrencies that automatically adjust asset supply and other important parameters to reduce volatility. In his analysis, Kent Barton, the author of ShapeShift responsible for research and development, focused on three assets: RAI, FRAX, and FEI.
related: ShapeShift decentralizes the entire company and plans to conduct the largest airdrop in history
Barton summarized the potential value propositions of algorithmic stablecoins as follows:
“The basic concept here is that if the stablecoin protocol can automatically manage supply by minting and destroying assets based on market conditions, it can ensure that assets remain close to their pegs. This can reduce reliance on governance and lower collateral requirements.”
The author explained that algorithm-based stablecoins are different from statutory-backed and crypto-collateralized stablecoins, but also pointed out that the variants of algorithms and crypto-collateral are not necessarily mutually exclusive. He said that these stablecoins are “collateralized to a certain extent, but also have mechanisms within the agreement to manage supply and reduce volatility.”
related: ShapeShift reports that “collateralized derivatives” are a potential win-win for PoS users
RAI, FRAX, and FEI have all received different levels of support from the encryption community, although FEI is the largest of the three, with a market value of approximately US$350 million. According to Coingecko’s data, by comparison, the total market value of FRAX is US$245 million, while the total market value of RAI is approximately US$28 million.
RAI follows a “redemption price” agreement for secondary market sales, which allows it to maintain stability over time compared to ETH-based underlying assets. Barton said that compared to long-term investors, RAI is a more suitable choice for traders.
FRAX is pledged by USDC, but its total support is always less than FRAX’s supply. This makes it under-collateralized and uses USDC instead of ETH to support the stability mechanism.
FEI is significantly different from these projects because it uses a binding curve that sells FEI as ETH. The wealth that enters the system is locked in something called the protocol control value, which is used to maintain the peg through the exchange’s liquidity management.
related: Fei Protocol Genesis has locked up $1 billion in ETH, but LP may face losses
Barton finally pointed out that algorithmic stablecoins are still in the early stages, which means that their success is far from guaranteed. Nonetheless, what is unique about this emerging asset class is its regulatory profile, its potential positive impact on DeFi, and its ability to promote niche use cases.
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