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Most decentralized stablecoins adopt an elastic supply monetary policy, using high interest rates to incentivize users to continue holding the stablecoin when its value falls below the pegged exchange rate system. The operating mechanism is as follows:
When weak demand leads to the stablecoin's value falling below the pegged exchange rate, the supply contracts.
When the stablecoin's value rises above the pegged exchange rate due to sudden increases in demand, the supply expands.
Users must lock the stablecoin in their accounts until its value reaches its target value, at which point they can earn profits from the system's interest rates. The interest rates are essentially similar to the annual rates offered by traditional banks to savings account holders.
Case: Nu
Collateral ratio: 0
Collateral: Unsecured
Pegged currency: US Dollar
The first stablecoin to use the elastic supply model was Nu, which uses a hybrid proof-of-stake (PoS) and proof-of-work (PoW) consensus mechanism based on Peercoin. Nu employs a dual-token structure, issuing two types of tokens:
Nubits: A stablecoin pegged to the US dollar.
NuShares (NSR): Tokens with a fixed supply, providing governance rights.
The supply of Nubits is determined by market demand, with interest rates serving as an adjustment mechanism. The price is directly fixed at 1 US dollar through buy and sell walls.
When market demand increases, Nubits' sell walls are depleted, and NuShares holders can vote to issue more Nubits to meet market demand. When market demand decreases, mechanisms like buy walls, interest rates, and conversion to NSR are used to recover liquidity and satisfy market demand for Nubits.
Weaknesses:
The pegged exchange rate system of Nubits was broken in December 2017 and April 2018. It is suspected that Nubit holders decided to sell Nubits to purchase Bitcoin (Bitcoin was approaching $20,000 at the time) in December 2017, taking advantage of the sudden increase in Bitcoin prices at the end of the year. The selling pressure caused a significant price drop for Nubits, exceeding the buying pressure from Nubit depositors and Nubit custodians (elected by NuShares holders) hoping to earn system interest.
Ultimately, Nubits failed to recover from the second collapse, losing most of its value and reputation among users. Some users even labeled Nubits as a scam and threatened to sue the founding team.
In the elastic supply stablecoin mechanism of Nubits, stablecoins held by custodians and newly minted stablecoins enter exchange buy and sell walls to intervene in the exchange rate with the US dollar, i.e., the price of Nubits. In extreme cases, the interest rates and newly minted stablecoins may not generate capital quickly enough to maintain the pegged exchange rate, and the interest rates generated during "unpegging" are difficult to quantify.
However, cost-effectiveness may explain why elastic supply cryptocurrencies are still welcomed by some stablecoin start-ups. In an elastic supply cryptocurrency system, dynamic supply rates and the absence of cryptographic asset collateral make them more cost-effective than partially or fully collateralized stable systems.
In reality, most national currency systems have no financial asset reserves and rely almost entirely on flexible interest rates and elastic supply policies to maintain their currency values while promoting economic growth. However, in the short term, most stablecoins may not have sufficient demand and supply to ensure price stability, thus requiring full or over-collateralization to achieve price stability. |
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Post time 2-10-2023 11:46:46