First-Class Cabin: An Analysis of the Operation Mechanism and Economic Model of the New Unsecured Stablecoin Float

Source: First Class Cabin

Current stablecoins can be divided into collateralized stablecoins and non-collateralized stablecoins, with the latter primarily consisting of algorithmic stablecoins. Since algorithmic stablecoins are built on nothing, they require extremely strong consensus; currently, only Ampleforth can fluctuate around 1 dollar for an extended period.

Float Protocol is a new type of non-collateralized stablecoin protocol that starts with the strong consensus of ETH as its reserve asset, providing a fundamental value. The protocol employs a dual-token mechanism, with a well-designed economic model, where the functional token BANK plays multiple roles within the protocol. The total supply of BANK in the first year is only 168,000 tokens, and it may increase in the future. The reduction in BANK circulation only needs to meet one of two conditions: 1) the ratio of reserve asset value to total stablecoin value is greater than 1.5; 2) the market price of FLOAT is above the target price. Given that the market is generally in an upward phase and the team is increasing FLOAT application scenarios, the likelihood of meeting these conditions is very high. The project is still in its early development stage, and its launch situation and subsequent applications and scale expansion of the stablecoin need to be observed. The risk is that during an overall market downturn, both the stablecoin and BANK may enter a death spiral.

Fundamental Overview

Team: Anonymous

Funding: No financing

Protocol Logic: The system uses a dual-token model, where FLOAT is the stablecoin, and its value is supported by a basket of cryptocurrencies (referred to as reserve assets, with the v1 version only supporting ETH). It is important to note that the reserve assets are not collateral but rather the assets users use to purchase FLOAT. The price of FLOAT is floating and does not have a fixed peg, with an initial target price set at 1.618 dollars. The target price will fluctuate with market conditions, but the adjustment rules and frequency have not been specifically stated for now. The official response on Discord is: "The fluctuation of the target price depends on the basket factor and whether the system is in an expansion or contraction state. The volatility of the target price will be lower than that of the ETH price and will lag behind." The value of FLOAT ultimately relates to its own demand and the value of the cryptocurrencies in the basket.

BANK is the governance token and also plays a role in stabilizing FLOAT within the system.

The operation of FLOAT will go through two phases:

Initial Phase: Users deposit ETH into the contract, and the system generates an equivalent value of FLOAT. At this point, the total value of ETH in the contract = the total value of minted FLOAT, and the ratio between the two is referred to as the "basket factor / treasury factor," which is 1 at this time. Assuming that ETH worth 1,618 USD is deposited into the pool, then 1,000 FLOAT will be minted. It is important to note that the deposited ETH is non-retractable, and FLOAT cannot be directly used to exchange for reserve assets within the system. 5% of the total supply of BANK is used to reward users who deposit ETH to mint FLOAT. The initial issuance phase of FLOAT will start after the liquidity mining of BANK's second phase ends.

Basket Factor = Total Value of Reserve Assets / (Total Value of FLOAT (calculated at target price))

Operational Phase: During operation, when the market price of FLOAT (time-weighted price) deviates from the target price, the FLOAT system will enter an inflationary or deflationary phase.

Table 1 FLOAT price and its impact on related markets. Note: In the table above, when using both ETH and BANK for auctions, the usage ratio of ETH is the same as the basket factor ratio. Example: If the basket factor is 0.6, 60% ETH and 40% BANK are required to participate in the auction.

In other words, the reduction in BANK circulation requires one of the following conditions:

1. The market price of FLOAT is above the target price;
2. Basket factor > 1.5.

Auction: The currently set auction interval for FLOAT is once every 24 hours. Subsequently, the project team plans to reset the auction frequency every two weeks, increasing it from 24 hours to 12 hours, then to 6 hours, and finally to 3 hours, continuing this way until auctions are held every 150 blocks. After this phase ends, auctions will be held irregularly, initiated by user demand. Additionally, users participating in the auction must pay the oracle quote fees required for the auction.

Data: Approximately 57 million USD participated in whitelist mining.

Economic Model

Token Distribution

The initial total supply of BANK (first year) is 168,000 tokens. Starting from the second year, the total supply of BANK will not be fixed, and the change rules can be found in Table 1.

Table 2 Initial Token Distribution

Liquidity Mining

Phase One, February 7 - March 21, lasting 6 weeks

There are 3 liquidity pools: DAI, USDC, and USDT, with each pool distributing 500 BANK per day, totaling 1,500 BANK distributed daily. For whitelist users, i.e., users participating in Snapshot governance, each whitelist address can deposit up to 10,000 tokens.

Phase Two, March 21 - April 03, lasting 2 weeks

No entry threshold, based on 4 pools (BANK, DAI, USDC, USDT), additional 5 pools (YFI, YAM, SUSHI, ETH, wBTC) are added for liquidity mining through governance voting. The BANK/ETH pool rewards a total of 7,000 BANK, while the other 8 pools each reward 1,750 BANK, totaling 21,000 BANK in rewards.

Token Uses

1. Speculative token: absorbs FLOAT volatility, see Table 1 for details;
2. Governance token.

Comprehensive Evaluation

Float Protocol has not officially launched and is in the phase of distributing the governance token BANK through liquidity mining. Based on the current amount of funds participating in BANK token liquidity mining, FLOAT is likely to successfully complete its launch. FLOAT is a non-collateralized stablecoin, with ETH as its fundamental value, which can avoid becoming "built on nothing." Based on the value of ETH, the value of FLOAT mainly depends on its own demand. Compared to algorithmic stablecoins, FLOAT does not have a rebase mechanism, making it more suitable for integration with other protocols. Moreover, it does not peg to 1 dollar, avoiding the associated risks of fiat currency systems. Overall, it is worth paying attention to.

Risk Points:

1. In cases of low incentive reward rates or lack of applications, the expansion of FLOAT may face bottlenecks;
2. If the overall price of reserve assets drops significantly, a death spiral may occur for FLOAT and BANK tokens.