Uniswap is the reason why algo stablecoins can’t maintain the peg and how to fix it

The Bank Run

The Bank of Umi
Stablecoin holder on Uniswap

The swap curve is the price

The “bank run” is faced by every single algo stablecoin that uses Uniswap as it’s primary liquidity pool. The Uniswap swap curve is the culprit of why they are off peg and also the reason why they’ve been able to bootstrap to hundreds of millions in marketcap.

Image for post
Image for post

The Evidence

SNX announced the sUSD Curve trial on the 12th March, 2020 with a V2 relaunch on 22nd April, 2020 due to a bug fix. Prior to the curve pool launch, Uniswap was the primary liquidity pool for sUSD, following the incentivisation of the sUSD iEARN finance pool on curve, that became the primary venue of sUSD trades.

Image for post
Image for post
Image for post
Image for post

More Evidence

Take Dai, the grandfather of all defi stablecoins. Over-collaterised at 150%.

Image for post
Image for post
Image for post
Image for post

Failure of the Hypothesis

Theoretically, the price should mean revert with lower and lower amplitude as the marketcap gets bigger and bigger.

Image for post
Image for post

Solutions

If not Uniswap, then what?

  1. There must be incentives/penalties under the peg to keep a healthy level of liquidity. Enough liquidity that a “bank run” scenario cannot happen.
  2. MMT style incentives/penalties to buys/sells before liquidity reaches a danger zone.
  3. Liquidity needs to be incentivised under the peg.

The swap curve is the price.

I give alpha on stablecoins. https://twitter.com/SabretoothSG

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store