Basis and DeFi Lego

This article was published on Blue Fox Notes.

Currently, algorithmic stablecoins are not a market hotspot, and it is difficult for them to perform well in the short term. Participating in algorithmic stablecoins also carries extremely high risks. Therefore, it is important to specifically point out that algorithmic stablecoins have a risk of going to zero; if you do not have the capacity to bear risks, you should not participate.

The reasons for maintaining attention to algorithmic stablecoins even during their low periods are as follows:

1. DeFi without algorithmic stablecoins is not true DeFi

Many people may only see DeFi as a speculative tool, but from the perspective of Blue Fox Notes, we view DeFi as a future development trend. From this perspective, DeFi Lego needs the last piece of the puzzle, which is algorithmic stablecoins.

Currently, the entire DeFi ecosystem has many stablecoins, including fiat-backed stablecoins, collateralized stablecoins, collateral and algorithm mixed stablecoins, and elastic stablecoins, but it still lacks truly decentralized stablecoins. DeFi needs algorithmic stablecoins to achieve its goals.

In the view of Blue Fox Notes, DeFi is an organic organization that arises from human thoughts and needs, ultimately constructing a mechanism that serves humanity while being independent of it, evolving on its own. Its final development does not rely on anyone's will.

2. Algorithmic stablecoins are the true holy grail in the crypto space

This viewpoint has never changed for Blue Fox Notes. Whether in a peak or trough, whether in the spotlight or ignored, it has always been the same. Blue Fox Notes' interest in algorithmic stablecoins is not due to the rise of Basis; we have been paying attention since 2018 and have published related articles such as "Comparison of USDT, BaseCoin, and MakerDAO: Who Will Win?" and "In-depth Thoughts on Stablecoin Basis."

From a maturity perspective, BTC > ETH > algorithmic stablecoins, while from a potential perspective, algorithmic stablecoins > ETH > BTC. This viewpoint has not changed.

Holy Grail, Image: Marcelo Somers

Algorithmic stablecoins are projects with extremely high difficulty, and their success is even harder than the initial success of BTC. Even today, the much-watched BTC has been declared dead hundreds of times throughout history. Of course, the logic here is not to equate algorithmic stablecoins with BTC, as such reasoning has no bearing on whether algorithmic stablecoins can succeed.

The initial goal of BTC was to become a peer-to-peer electronic payment system, to serve as electronic cash. However, over time, BTC has not fulfilled that initial goal and has instead drifted further away in terms of value storage and circulation, increasingly becoming the "gold" of the digital age. Algorithmic stablecoins may take over to achieve BTC's original goal. Whether this goal, which BTC did not achieve, can be accomplished by algorithmic stablecoins is uncertain, but in terms of difficulty, it is far greater than BTC's goal. However, the favorable condition today is that few believed in BTC initially, whereas the crypto space now has many supporters.

Because the difficulty of algorithmic stablecoins is the highest in the crypto field, they are not like lending, DEX, or derivatives, which are tangible with visible returns and income support that everyone can understand. Therefore, success in these areas is almost inevitable; it is just a matter of which project will succeed.

3. Algorithmic stablecoins are an unprecedented human social practice

Scientific experiments can fail, and social practices can fail as well. The difficulty of social practice is greater, with more uncontrollable factors and stronger uncertainties. We cannot say that algorithmic stablecoins have been falsified yet, as they have not yet completed their journey. However, whether they will be falsified in the future is uncertain.

No one can guarantee that algorithmic stablecoins will definitely succeed. This is a path that no one in human history has ever walked before; it is a narrow gate.

In our view, algorithmic stablecoins will be a continuous pursuit of DeFi. They will benefit from the overall ecological growth of DeFi, and as long as the DeFi ecosystem reaches a certain robustness, algorithmic stablecoins will be embedded in the DeFi system.

4. The one that succeeds in algorithmic stablecoins may not be Basis

Although we are currently focusing most on Basis, the one that ultimately succeeds may not necessarily be Basis; perhaps new algorithmic stablecoins will emerge in the future. But as long as they can succeed, it is a good thing for the development of DeFi. Success does not have to be in Basis. Blue Fox Notes looks forward to more truly innovative stablecoin practices.

5. Algorithmic stablecoins carry extremely high risks; early participation is not suitable for most people

The early algorithmic stablecoins themselves did not have actual demand support and were basically based on speculation. Their early phase was highly speculative, inevitably leading to significant volatility. In this volatile process, it is a zero-sum game; someone profits at the expense of someone else losing.

Therefore, in the early stages, Blue Fox Notes has always emphasized that if you are not familiar with the mechanisms involved, it is best not to enter the market. This is also why Blue Fox Notes has consistently stressed that unless a person has a deep understanding of the matter itself, it is best not to participate.

Before the successful practice of algorithmic stablecoins, there will be countless struggles on the edge of life and death, and the vast majority of algorithmic stablecoin projects will ultimately fail, leaving chaos in their wake.

6. What does algorithmic stablecoins rely on to stand firm?

For algorithmic stablecoins to stand firm, it depends on two points:

The sustainability of demand for decentralized stablecoins

Currently, the demand for Basis's stablecoin BAC mainly comes from liquidity mining, which is to earn BAS rewards, but this is not a sustainable process because there is no real source of demand. If it relies solely on this, it is undoubtedly a "perpetual motion machine," which cannot be sustained.

To break this, it is necessary to increase the actual demand for BAC. The Basis team is naturally aware of this and is addressing it through short-term, medium-term, and long-term strategies. For more on this, refer to Blue Fox Notes' previous article "The Path of Basis's Algorithmic Stablecoin."

In the short term, they attempt to stabilize the price through arbitrage with Stabelswap and BAS incentives; in the medium term, they aim to incentivize usage through synthetic assets and savings models; in the long term, they seek to build a stablecoin index through a swap model, breaking away from the dollar peg.

From Blue Fox Notes' observation, the attempt at synthetic assets is crucial for the success of BAC. It can deeply learn from the Synthetix model, collaborating with protocols like Curve to guide liquidity and ultimately build a generation and trading network for synthetic assets.

Of course, how it ultimately evolves will depend on the decisions and execution of the project team and community, as well as whether they can fully leverage this window of opportunity for DeFi development.

The sustainable development of DeFi

DeFi is the soil for algorithmic stablecoins. Without the fertile soil of DeFi, algorithmic stablecoins cannot succeed. As long as DeFi itself can continue to develop, the practice of algorithmic stablecoins can also proceed.

Today's DeFi scale is still small, but if DeFi exceeds a total market value of over a trillion dollars, algorithmic stablecoins will become a much-needed part of it. Of course, currently, DeFi has USDT, USDC, and DAI, and the demand for algorithmic stablecoins is not strong, even somewhat dispensable. However, as DeFi continues to develop, this demand will become increasingly strong. DeFi is the support for the success of algorithmic stablecoins.