{ess} — A brief intro towards novel elastic stablecoin implementation

ESD is an elastic stablecoin implementation from the {ess}. Elastic stablecoins use supply elasticity method for price stability. This means that as price increases →supply increases putting downwards pressure on price and as price decreases →supply decreases putting upwards pressure on price.

The crypto world has not taken to recent elastic coins implementations nicely, we have seen prolonged ranges of supply expansion and contraction, some even spiralling down to nothingness. This makes them too risky for usage. Here I will try to explain how the {ess} has a novel way to achieve the increases and decreases in supply and hence is better in keeping the price nearing dollar.

To explain this, lets get you introduced to three typical participants in the market-

1. Mr. Hodl — Long term holder; this guy keeps all the ESDs as bonded as he wants to hold them long term; and participate in the DAO.
2. Mr RT — A rational trader; this guy keeps some ESDs bonded, some in circulation to get the benefit of price increase as well as supply increase. May as well take part in DAO.
3. Mr Gamble — A gambler; this guy is here for quick profit. He will actively trade on the price increase or decrease.

Everyone of above ESD holder can do three things:

1. Bond them — This gives them reward from increased supply when the price increases. The reward is increase in the supply by X percent subject to a maximum of 10% per epoch. (Period of 1 day). All of supply increase only goes to bonded tokens and not tokens in circulation.
2. Trade them — Use ESDs for normal transactions. Eg. buy eth, usd or any other asset
3. Burn them against coupon — Coupons are debt instruments issued by protocol when the price is less that 1$ to reduce supply. ESD holders can burn ESDs for a premium amount of coupon in the event of supply contraction. This depends on how much supply needs to burn. If premium is let’s say 20%, ESD holders can burn 1 ESD and get 1.2 Coupons. These coupons will be converted into ESDs at the time of supply expansion in the ratio 1:1. So coupon holders in our example will get 1.2 ESDs, essentially earning a 20% interest. During supply expansion, coupon holders are redeemed first and then any remaining ESDs are rewarded to Bonded ESDs
4. Advance() — Use the advance function on the contract to advance epoch and get free 100 ESDs. You dont need to hold ESDs for this, anybody can do this. Contract would also issue coupons or new ESDs to bonded ESDs on each advance; depending on the price.

Scenario 1: Increase in price above 1 dollar

As new people get to know about ESDs; there is a demand increase which increases the price to more than a dollar. The contract issues new ESDs to the bonded ESD holders. Now lets look at our three participants

Mr. Hodl is in for the long haul so he remains put;

Mr. RT tries to unbond some of the new minted ESDs so as to decrease his exposure and take some profits. But he has to wait an epoch for this(one day)

Mr. Gamble is currently trying to assess whether to sell here or buy more; as it would be some time before the supply catches upto the demand.

There will be some time before actual supply hit the market(from Mr. RT unbonding), while the actual supply in the market decreases (More of Mr. Hodl, RT, Gamble coming to buy) and the price increases.

After certain epochs the supply from overtakes and price decreases. Forcing Mr. Gamble and some amount of Mr. RT to sell. Notice that Mr. Hodl is profitable and not really underwater till the price decreases well below 1 dollar.(He has much bigger portion of expanding supply as was bonded throughout)

Scenario 2: Price below 1 dollar.

Lets assume there is enough selling pressure and some of Mr. Gamble capitulate to decrease the price below 1 dollar.

Now some of the Mr.RTs and most of the Gamble are underwater holding ESDs, As they couldnt sell in time. At this point the contract starts issuing coupons which will burn the excess ESD supply. As these look really attractive to RT and Gamble, they will begin buying the coupons to recoup loss. Some of the earlier RT and Gamble who couldnt get in earlier would jump in seeing opportunity to get in and gain profits.

This in-turn would increase demand as well as reduce supply. Eventually pushing the price higher. The lower price goes below dollar; higher the interest rate and demand for the coupons.

Subsequent cycles

In the subsequent cycles, there will be many coupon holders who would want to get out, and some Mr. Hodl who would have turned into Mr. RT and Gamble. Keep in mind here, Mr. Hodl would not get the benefit of supply expansion at first; owing to coupon redemption. This would increase the supply of ESD much earlier and thus the price would not go as high as before.

Eventually the price could look like a decreasing wave below; bouncing above and below the dollar;

Amplitude here is the price

Cryptoeconomic features:

1. Empty set protocol incentivises the long term holders and disincentivises the short term speculators by:

a. Bonding — Only bonded tokens get the pie of expansion

b. Epoch lock — This can be a anti dumping feature as rewards cannot be claimed instantly. Everyone can see the unstaged tokens which are going to release in next epoch and thus have an idea about supply.

2. Coupon — Coupon feature reduces the concentration of tokens towards subsequent cycles. The expansion of supply reduces debt to zero (turn coupons to ESD + interest) before rewarding them.

3. DAO — The voting concentration of Dao is going to be towards the long term holders Mr. A who would want to increase protocols value as opposed to Speculators Mr. B and Mr. C.

4. Coupon risk — And lastly the coupon risk. The coupons will expire worthless if there is no supply expansion after a certain period. This feature makes up for the ever inflationary supply of the protocol. In event of very long term contraction the coupons will become zero, currently the period is set to 90 days and subject to change through DAO votes.

Conclusion

The protocol uses a novel method towards achieving the price target as opposed to the recent slew of stablecoins/coin with rebases (supply elasticity). The supply is decreased with the issue or coupons and expiry during price decrease/ prolonged price under water. This time risk and coupon risk are competing forces against interest and expansion rewards which could keep the coin bouncing around a dollar.

Github Repo: https://github.com/emptysetsquad/dollar

Dashboard Github Repo: https://github.com/emptysetsquad/dollar-dashboard

Whitepaper: https://github.com/emptysetsquad/dollar/blob/master/d%C3%B8llar.pdf

Dashboard via IPFS: https://gateway.pinata.cloud/ipfs/QmQa6AFnREJmx59utDBNsaWASTLFX3BeKzy8seFmJR6qZE/#/

ESD Token Contract: https://etherscan.io/token/0x36F3FD68E7325a35EB768F1AedaAe9EA0689d723

ESD-USDC Uniswap Pool: https://uniswap.info/pair/0x88ff79eb2bc5850f27315415da8685282c7610f9

Website: https://www.emptyset.finance/