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Detailed explanation of the algorithm stable coin Float Protocol working principle

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Can Float be a dark horse in the algorithmic stablecoin field with the introduction of whitelist mining?

Float - A New Generation of Purchasing Power Parity Currency

The little flying toe

"Holy grail" in the field of algorithm stability of currency is the currency of the encryption (blue fox notes), with the continuous development of DeFi, now bear the base currency USDT and USDC (and BUSD/HUSD, etc.), DAI are obvious problems, to create a stable currency, pure algorithm completely decentralized by power of mechanism and carry the entire monetary system is running, is an intuition on the optimal solution; And it's still very exciting to be the Federal Reserve of the DEFI.

Moreover, in today's MMT and tomorrow's global asset bubble will eventually burst, the reflection and optimization of the global monetary system will be constantly mentioned in the next decade, and the attention of the algorithmic stablecoin project will not stop.

Since the beginning of AMPL in the second half of 20 years, algorithmic stablecoin projects have emerged one after another, which can be roughly divided into the following categories:

A. AMPL and its imitators. AMPL remains the most successful project in the algorithmic stablecoin space, even though the model has been criticized by many and imitators have largely died;

B. ESD and its imitators, the model is largely dead;

C. Basis and its imitators, currently BSC's BDO (SBDO) and HECO's bag(Bags) are doing well, but all items on the ETH chain are miserable. For now, the original BASIS bond system's "deflation but inflation" solution is a dead end, and solving the Sheung Shui problem is the key to its continued survival.

Then there are Frax and its imitators, which fall somewhere between collateral and algorithmic stablecoins, with relatively stable growth but a relatively low ceiling.

Recently, as Reflexer and Float Protocol have begun to enter the mining phase, the concept of "low-volatility, non-collateralized ETH based currencies" has gained traction.

Project Introduction

Float defines itself as a Floating, low-volatility Currency for Web3. The team is an anonymous team.

Token mechanism

There are two tokens in the project, Float and Bank, where:

Float is a "stablecoin," but the team claims that a Float does not anchor a dollar, but rather floats, "which, like most major fiat currencies, is designed to Float and change value over time." The initial price target is $1.618, subject to market conditions.

Bank is responsible for stabilizing Float values (including lowering Float values in case of inflation and boosting Float values in case of deflation) as well as for governance.

Stability mechanism

Every 24 hours, the system triggers a rebase to stabilize the Float price again. The process of rebase is that the user pays ETH (V1, V2 plans to introduce other assets, but V1 only has ETH, which will be replaced by ETH below) and Bank to get a new Float for the protocol (in case of inflation), or the protocol uses ETH and Bank to buy back the Float(in case of deflation).

If Float's price deviates from its target price:

In the case of inflation, the system changes the supply and then influences the price by casting floats. The specific implementation is Dutch auction (arbitrageers have the opportunity to buy new floats at a price lower than the market price). The banks affected by the system will be destroyed and the ETH will enter the vault.

In deflation, the system revamps the supply chain and influences prices by buying and burning floats, in the form of a reverse Dutch auction (where arbitrageurs have the opportunity to sell floats at above-market prices) and destroying repurchased floats.

In this way, through arbitrageurs to change the supply in the market, and thus achieve stability.

An example of an inflation cycle

Assume that the current Float target price is $1.50 and the market price is $2.00. In this case, the new Float will be launched at a diminishing price, starting at $2.00 and gradually dropping to a starting price of $1.50.

Logically, an arbitrager would auction off enough floats to sell to the market to bring the price closer to the target price.

When buying a Float, the arbitrager pays ETH and BANK. Normally (with 100% vault adequacy), they pay $1.50 at ETH and the remaining $0.50 (market price - target price) in BANK:

The ETH received by the protocol is stored in a vault to support Float prices when demand is low;

The Bank upon receipt of the agreement will be destroyed immediately.

The ETH/BANK ratio depends on whether the Vault Factor is in surplus or deficit at the time of expansion (more on the Vault Factor later). In the case of surplus, some additional ETH is stored in "the Rainy Fund" to vault factor < 50%) to support Float.

An example of a deflationary cycle

Assume that the current Float target price is $2.00 and the market price is $1.50.

In this case, the agreement will buy the Float from the market at an incremental price starting at $1.50 and gradually rising to $2.00.

Logically, the arbitrager would buy the Float from the market and sell it to the agreement, bringing the market price closer to the target.

The protocol will pay ETH and BANK to buy Float:

The ETH used to buy Float comes from the vault;

The BANK used to buy the Float is cast flat by the protocol;

Similarly, the ETH/Bank ratio depends on whether there is a surplus/deficit of ETH in the Vault;

The Float purchased by the agreement is destroyed immediately.

In particular, if Vault Factor <; 50%, triggers a rainy day fund to buy back the Float

VAULT (Treasury)

In the Float mechanism, the ETH (or other basic "collateral" planned for V2) is locked in the vault. In the initial phase, this portion of the ETH in the contract will not be used for anything other than waiting for the Float to be repurchased during a deflationary period (which does not mean that it will not be purchased later). The vault is the key reserve that will bring the Float back to the target price during a deflationary period.

With the locked ETH in the vault, using Float's stabilization mechanism, there is an "ambiguous" connection between "air Float" and "value coin" ETH:

In the ideal state (where the target price = the current price), the ETH in the vault and the Float in circulation have the same market value, so,The anchor of the total market value of Float is the market value of ETH locked in the vault.

Float is like a horse, and locked ETH is like gold on a carriage. The horse will continue to pull the cart forward, whether it is forward or backward; The value of the horse itself may not be everyone's concern, but everyone wants the gold, and so the horse has value.

Also, the current mechanism allows the ETH locked in the VAULT to be released only when the Float enters the deflationary phase, which further increases the coupling between the Float and the ETH: a tight coupling without collateral.

In the initial stage of the project, if the strategy is proper, the high-priced Float will stimulate the arbitrage demand, and then a large amount of ETH will be stored in Vault, which will become the cornerstone of Vault's value.

Vault Factor

Vault Factor = ETH market value locked in the VAULT/Float target price market value in circulation.

The following table introduces the changes of the BANK value and VAULT FACTOR in the auction when the superimposed Treasury adequacy ratio itself is in surplus or insufficient state in the inflation stage and deflation stage:

If the current Vault Factor is A, then A-1 >; When 0, vault factor is surplus state, otherwise it is insufficient state

It can be seen that the Vault Factor decreases only in the state of inflation and surplus (top left). In the other four cases, the VAULT FACTOR will increase.

What is a little difficult to understand is that in the deflationary and surplus (upper right) state, although the Vault Factor itself is already in surplus, the occurrence of rebase will still cause the Vault Factor to increase.

In view of Vault's role as the anchor point of the whole system, the concept of Vault Factor is actually very important. Vault in surplus will make the whole system very healthy (overmortgage). Therefore, in most cases, the system always hopes that Vault Factor can be improved

The chart below shows the official price retest for 2020: ETH price vs target price deviation ratio vs Treasury adequacy

The graph given by team member Paul during his presentation in Hackclub, back test the percentage of daily price change of ETH and Float:

Daily Float target price and ETH price movements & NBSP; & Float target price vs. anchored dollar stablecoin:

Token allocation plan

The project takes the form of democratic distribution, and unlike most projects, Float Protocol starts single-coin mining for the governance token BANK first (rather than the stablecoin), and then starts Float minting after the BANK distribution is basically complete.

The detailed information distributed by Bank is as follows:

A total of 168,000 banks will be cast in year 1. The expected distribution is as follows:

Community distribution: 50%, with 37.5% for Phase 1 and 12.5% for Phase 2

Team Token: 5% (distributed after the initial coinage and locked for 12 months).

Treasury: 10% (Cast at the beginning of Community Distribution Phase 2 and controlled by DAO).

Post-issue liquidity incentive: 35% (5% of initial circulation coinage, 30% controlled by DAO, with the goal of various liquidity incentives and partnerships).

A year from now, the BANK may have inflation, which will be controlled by the DAO.

Phase 1 (starting Sunday 7 February at 22:00 UTC and lasting for 6 weeks until 21 March)

The project uses a whitelist system. At present, the whitelist is composed of the off-chain governance and/or Compound of any protocol on Snapshot. Page, representatives of the address on the chain governance on MakerDAO or MolochDAO, YARN, UMA, YAM, Curve - Delegates.

Each day 1,500.00 Bank will be allocated. A total of 10,500 Bank will be distributed each week, for a total of 63,000 Bank on 6 Mondays.

Phase 2 (from Sunday 21 March at 22:00 UTC and lasts for 2 weeks)

The second phase aims to provide wide distribution to the top DeFI protocol community and to achieve initial price discovery for BANK tokens.

In contrast to the first phase, there will be no whitelisting restrictions. In addition, a new pool of unstable coins will be added, with a total of 1,500 Bank distributed daily (all pools)

The full announcement will be available one week before the start of Phase 2 (i.e. 14 March).

In addition, in phase 2, the system will also incentivize Bank-ETH's pool of liquidity to better discover prices.

Initial Float

An audit of the agreement is passed, and after an eight-week distribution period, initial Float coinage takes place. During this time, the user can purchase the Float using ETH, and the agreement will use 5% of the total amount of the Bank to incentize the purchase.

One week before the eight-week initial allocation period ends (on March 28), more details will be released about the number of Floats that can be purchased and the exact mechanics of the initial coinage ceremony.