ethos.
We launched ESD with the goal of creating the algorithmic stablecoin. Rather than betting on a single model, it was more important to build an open platform for collective experimentation. Through our first iteration, and by learning side-by-side with our peers, we’ve collected a host of insights converging us towards an optimal model that can be used as the reserve currency for decentralized finance.
ESD is our dollar.
learnings.
Since launching six months ago, we’ve been able to collect a wealth of insights on what works and what does not in algorithmic stablecoin models:
- Un-collateralized models have viral reflexivity which is essential for early growth of the project, but it becomes the biggest instability contributor as the project achieves critical mass.
- Bonds suffer from the tragedy of the commons — they work well when issuance is low, but break down when there are no longer buyers of last resort large enough to stabilize the protocol.
- Though noble, it’s intractable to decouple up and down regulation incentives in a one-token model without quite significant lockups.
Note: a full write up of ESD and our learnings will be published at a later date.
ecosystem.
We’ve been privileged to have such a diverse community interacting with the protocol at this early stage. This community is not only actively engaging with ESD but also refining the protocol to ensure its longevity.
As such, Continuous ESD is a direct result of Scott Lewis, Will Price, and team’s V2 research, with additional contributions from the {ess}, Sn2, Jon Itzler, Ben Simon, Andrew Kang, Dan Elitzer, Jordan Clifford, Linda Xie, Tim Hawbaker, Dan Robinson, Yan Liberman, and many others.
continuous.
The next iteration of the ESD experiment will be a two-token, protocol-owned collateral algorithmic stablecoin.
Two-Token Model
We will migrate to a two token model with ESDS as the transferrable governance token + seigniorage share, and ESD as the stablecoin. This structure will give us three main advantages:
- Decouples incentive to lockup circulating supply from growth.
- Decouples governance security from locked up circulating supply.
- Enables a smooth issuance reset while maintaining equivalent ownership.
Reserve
We will use a protocol reserve as our main lever for stability.
- ESD can always be minted from the reserve for
1 USDC. - ESD can always be burned in the reserve for
RR USDC, whereRRis the current reserve ratio capped at1.00.
Role of ESDS
ESDS can be purchased by the reserve and burned when RR is above target as a result of:
- Yield from reserve management.
- Growth from reserve investments.
- Revenue from ESD issuance after the target
RRhas dropped below1.00.
ESDS can be minted by the reserve and sold when RR is below target.
Mitigating Bank Runs
By setting our rage quit price equivalent to the reserve ratio we eliminate the incentive to redeem early in the event of a bank run. Coupled with our ancillary stability mechanisms this means that the system should be able to weather a temporary period of under-collateralization without sparking a death spiral event.
Migration
All outstanding ESD (both circulating and bonded) will migrate into Continuous ESDS which will maintain equivalent protocol ownership through the upgrade. Continuous ESD issuance will restart at zero, enabling full collateralization from launch.
Safely Experimenting
To enable a safe experimentation environment once we’ve bootstrapped, governance can artificially lower the redemption price using an EXIT_TAX to create a non-zero hard price range. This enables safe efficacy testing for various ancillary stability mechanisms while the system is still over-collateralized and can easily rollback.
This model’s strategy is to initially start out fully or over-collateralized until an ancillary stability mechanism can be proven, at which point governance may reduce the target RR at its discretion to improve protocol efficiency.
timeline.
Work on Continuous ESD began at the start of the year. Development will be wrapping up shortly with an audit kicking off late Q1.
Pending governance approval, Continuous ESD will launch early Q2 once the audit process is complete. A series of proposals will be made to v1 in parallel to prepare for the migration — additionally these proposals passing will de facto approve the Continuous ESD upgrade.
