While wild price action on Bitcoin and Ethereum have claimed the attention of most traders over the Christmas weekend, a select sect of crypto traders are following an experiment playing out in real-time that may have implications for the future of stablecoins: the fate of Dynamic Set Dollar.
Dynamic Set Dollar and its DSD token is an algorithmic stablecoin project designed to — eventually — track the United States Dollar on a 1-1 ratio with DSD. During expansionary cycles, such as one that led DSD as high as $3 per token last week, users are rewarded with freshly-printed “rebased” tokens for providing liquidity.
According to Avalanche blockchain platform founder Emin Gün Sirer, however, developers of protocols like DSD face a much tricker task during price dumps like the one DSD is currently experiencing: incentivizing users to adjust the amount of tokens in circulation. In DSD’s case, holders can burn their tokens at any time for “coupons” which they can redeem at any point within 30 days so long as DSD is above $1 per token — hypothetically enabling them to reap significant profit.
“These mechanisms rely on whales who will jump in and out of the coin in order to stabilize its price around the intended target,” said Sirer in an interview with Cointelegraph. “And they implicitly assume that the whales share the exact same worldview as the coin’s designers: that the stablecoin should be worth $1. But if the whales do not share this view themselves, […] the coins can fail and break their intended peg.”
In a Twitter thread on Saturday, Sirer noted that this disconnect between game theoretics and developer intentions can lead participants in a protocol to identifying a Schelling point/price peg, but not the one developers had in mind:
To use technical jargon, there may indeed be a Schelling point, but that point may reside somewhere other than the designer’s intended $1. Let me illustrate.
— Emin Gün Sirer (@el33th4xor) December 27,…