Stablecoins go Brrrrr

Dec, 20 2020
4 Minutes

Empty Set Dollar and, to a lesser extent, Basis Cash have been on a tear recently.

Empty Set Dollar is minting millions of ESD every 8 hours, virtually doubling its supply this past week (Dec 12-19, 2020). Basis Cash is growing by millions of BAC every 24 hours, quintupling its market cap this week.

market cap go up

Unlike DAI or USDC, Empty Set Dollar (ESD) and Basis Cash (BAC) have no collateral that backs their value. They are entirely algorithmic. This is how they work:

  • When the price is greater than $1: brrrr (print money)
  • When the price is less than $1: issue bonds/coupons.

A coupon/bond basically says "if you destroy your money now, we'll issue you a coupon for more than it's worth when we print more". In other words, destroy some tokens now and get more tokens in the future - the marshmallow test.

These are both young projects and it's exciting times.

But what's somewhat alarming is that these coins have been off their peg quite a bit this week (black line indicates $1):

stablecoins not stable

Yes, they're both new and over time, I have some level of confidence that they'll return to their $1 peg, but there are still questions that give me pause.

Return of the Apes

Liquidity mining for Empty Set Dollar has attracted the apes. The surge in price of ESD (remember, it's a stablecoin) is almost entirely attributable to the ridiculous yields:

degen esd farming

DeFi summer like yields are back. This time, brought to you by ESD.

But the crazy thing is this isn't a liquidity mining incentive. This is just how ESD works. Right now, because ESD is above the $1 peg, the algorithm is choosing to expand supply. It does so by rewarding those ESD holders who have bonded their ESD to the DAO, or have bonded their ESD/USDC LP Tokens  to the protocol.

This is a strange. Consider the following incentives that exist when ESD is above $1:

  • an incentive to buy ESD and bond it (to capture some of the expanding supply)
  • (for existing holders) an incentive to bond your ESD to the DAO (to capture some of the expanding supply)
  • (for existing holders) an incentive to sell your ESD for another stablecoin (to arbitrage)

There are incentives to move the price of ESD in both directions.

ESD can only be stable when the incentive to sell outweighs the incentive to buy. This is a super strange for a stablecoin and I suspect these competing incentives will lead ESD to have extended episodes above $1 in the future.

With degenerate casino yield farmers constantly looking for insane APYs and coordinating themselves in Discords, you might even get some reflexivity that drives the price upwards from time to time.

I have a lot of questions about ESD issuance in such a world, but one must hope that cooler heads will prevail and arbitrage ESD back to its peg.


At the core of both of these stablecoins is an issuance model that benefits certain individuals at the expense of others.

ESD benefits those who have "bonded" their ESD - either to the DAO or Liquidity Rewards.

BAC benefits those who own a complimentary token BAS (all new issuance goes to BAS holders).

This is unlike Ampleforth which changes everyone's balance daily. This doesn't benefit or harm anyone (i.e. the Cantillon Effect).

I don't have any hypotheses on how the "fairness" of a stablecoin will affect the demand for it. Are all stablecoins viewed as equals? Will people want Ampleforth more because it distributes (and contracts) its supply more fairly?


An algorithmic stablecoin like ESD and BAC are only stable if they can retain their peg. But what happens if the price falls below $1 and not enough people believe that there will be future issuance?

If that ever happens, then the price of ESD and BAC could never return to their peg, and confidence in these assets would fall. As more people lose confidence, we get reflexivity in the downwards direction as a falling price leads to a greater collapse in confidence, which leads to more dumping.

This would result in a collapse in the value of ESD or BAC. Will these stablecoins fail spectacularly? Can the pseudonymous teams behind these projects come up with a strategy to mitigate this potential nightmare?

Early hopes are that ESD V2 could potentially dampen these effects with the introduction of a treasury. This would transform ESD from a pure algorithmic stablecoin into a hybrid algorithmic, collateral backed stablecoin. ESD could become a multiplier on top of other stablecoins, drastically expanding supply while offering greater price stability through the arbitraging actions of the treasury.


I'm watching this space with caution. The demand for stablecoins is massive, and algorithmic stablecoins could potentially scale to supply that demand.

But they aren't without flaws. They could potentially go to $0. Or they could fulfill their vision and bring a programmable medium of exchange to the masses.

Only time will tell.

Some links for further reading: