The Top Five Algorithmic Stablecoins Explained in Detail

1. FRAX

The first stablecoin protocol using a fractional algorithm is Frax. It is one of the best algorithmic stablecoins. Frax is now implemented on Ethereum and 12 other chains and is open-source, permissionless, and on-chain. The aim of the Frax protocol is to replace digital assets with a fixed supply, like BTC, with a highly scalable, decentralized, algorithmic currency. Two stablecoins, FRAX and FPI, are part of the Frax ecosystem (pegged to the Consumer Price Index). To provide a new scalable, trustless, stable on-chain currency, Frax is the first stablecoin protocol to implement design ideas from completely collateralized (such as Maker Protocol) and fully algorithmic stablecoins. Since FRAX is tied 1:1 to USD, it aims to maintain a value of 1 FRAX = 1 USD$.

A stablecoin named FRAX and a governance token called FXS are implemented under the Frax protocol. FRAX can be backed by collateral and an algorithm- thanks to the two token scheme (burning and redeeming of FXS). When FXS and collateral are deposited into the Frax protocol contract, FRAX is created. The amount of collateral that must be placed to mint 1 FRAX is determined by the collateralization ratio. The ratio between collateral and the algorithm that makes the $1 FRAX value is determined by the Frax collateralization ratio.

Neutrino USD

In 2019, the Neutrino protocol was used to generate the algorithmic USD-pegged stablecoin known as Neutrino USD (USDN). The WAVES coin serves as USDN's collateral. Smart contracts control all aspects of USDN operations, including issuance, staking, and reward payments. Given that WAVES backs every USDN token, arbitration bots can offset any deviations from the 1:1 peg.

Like other stablecoins, USDN enables cryptocurrency users to conduct transactions or exchange money between different applications (including exchanges) in a stable currency as opposed to historically volatile crypto-assets (such as WAVES or BTC). By securing WAVES in the contracts of the Neutrino Protocol, users can produce USDN. The opposite result would occur if USDN were sent back to Neutrino (i.e., destroy USDN to unlock the WAVES supply). The Ethereum ERC-20 blockchain supports the USDN assets that have been Waves-ported to the Ethereum network. The Waves blockchain's smart contract locks the exchange gateway.

USDD

The TRON DAO Reserve has released the cryptocurrency USDD, which has steady pricing and a range of applications. The USDD's stability, security, and value as a legitimate settlement currency are all enhanced by the assured over-collateralization using a variety of popular cryptocurrencies. USDD took a few weeks to come in a list of top five algorithmic stablecoins.

By allowing USDD to be used for electronic payments, the USDD protocol is dedicated to satisfying consumer demand for robust digital currency. To do this, a robust, decentralized, and tamper-proof USDD-USD system will be established by pegging the USDD protocol to the USD, the most extensively used fiat currency in the world. The protocol manages how currencies work and close the gap between digital assets and real-world uses. Whether a stablecoin protocol has enough asset value to support it determines its level of security.

The TRON DAO Reserve has added high-liquidity digital assets, including BTC, USDT, and TRX, for over-collateralization in the protocol based on the TRX burning mechanism provided by the USDD protocol. Given that the present minimum collateral ratio is set at 130 percent, the total amount of collateralized assets will always be much greater than the total value of USDD in circulation. The ratio will be able to dynamically change to preserve stability based on changing reserve asset values and market conditions, thanks to the responsive monetary policy instruments. For complete transparency, all collateral assets are kept in open on-chain accounts and posted on the TRON DAO Reserve website.

MIM

The Magic Internet Money token is a stablecoin tied to the USD, which is backed by tokens that pay interest! MIM must continue to be tied to the USD since it is a stablecoin. To keep things simple, arbitrage is used as the mechanic. Users with debt in MIM might see that the currency is trading below 1 USD on some markets and opt to purchase some MIM at a bargain to pay off some of their debt. This MIM acquisition will result in a price increase compared to their volume.

Users who own components (legal collateral) may elect to establish a position and sell the MIM they borrowed to use it elsewhere after noticing that it is trading on the market above 1 USD. With their volume, this transaction will result in a price reduction. Users who own other cryptocurrencies, whether stablecoins or not, may notice that MIM is trading in two of the marketplaces at different prices and decide to buy MIM in one of the markets where the price is below 1 US dollar and sell the MIM in another market where the price is at 1 USD or higher.

The majority of Market to Market arbitrage is typically carried out by automated bots that continuously scan pools for opportunities to profit from these pricing disparities. Price pegs may be quickly corrected as a result, which is advantageous. If algorithmic stablecoins regulation comes into effect, these algorithmic stablecoins might need to change their approach.

Fei USD

The objective of the Fei Protocol is to create the decentralized, $1-pegged stablecoin FEI scalably. The FEI peg mechanism is simple on a high level. The Fei Protocol algorithmically controls a reserve of tokens (Protocol controlled value) to enable direct FEI redemption at $1. FEI can be created and redeemed for $1 in security. On secondary markets, arbitrageurs guarantee a tight peg. Depending on the state of the market, DAI, ETH, and LUSD are among the assets that can be created or redeemed.

Protocol Controlled Value, or PCV, is the name for the protocol reserves. With the following objectives, the PCV is used in a mix of liquid and illiquid strategies:

They are maintaining the peg giving FEI and Tribe DAO goods utility and liquidity maximizing yields in agriculture. Tribe benefits from protocol productivity while also acting as a governance tool.

Tribe guarantees reserve deficits, and if PCV ever falls below 100% collateralization, an on-chain recovery mechanism would issue a new TRIBE to repurchase FEI debt. When there is a surplus, the protocol uses FEI to purchase TRIBE back off the market at a portion of the excess.

Wrapping Up

So, here was a list of the top five algorithmic stabelcoins. Please remember that there are risks in algorithmic stablecoins. Do your research before using algorithmic stablecoins. This article is for educational purposes only and shouldn't be misconstrued as investment advice.