gyroscope-protocol
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gyroscope-protocol

Gyroscope: a new crypto-native self-stabilizing money

Today we are excited to announce the launch of the alpha testnet of Gyroscope. To test it out, take a look at this guide.

Gyroscope is a new stablecoin design that, like a physical gyroscope, remains stable as the surrounding environment changes. Its reserve of capital acts like a spinning disk, maintaining a dollar target.

Gyroscope experiences “friction” if assets in the reserve lose value and users swap Gyro Dollars for the underlying reserve assets. Drawing on the reserves makes the stablecoin “wobbly” as the spinning disk slows, similar to a physical gyroscope. But crucially, also like a physical gyroscope, it can be “spun” back up, with high reserve yields and inflows to the stablecoin boosting the reserve.

The Gyroscope Mechanism

The Gyroscope reserve is an all-weather portfolio, diversifying not just price risk but also counterparty, censorship, and regulatory risks. In doing so, it maintains the original value propositions of DeFi.

Yet since any optimal all-weather crypto portfolio that balances these risks will retain price-risk, Gyroscope needs more parts than just a reserve fund.

It uses a closed arbitrage loop on the upside: if the price rises above the peg, more stablecoins can be minted and sold on the market, with the proceeds growing the reserve.

On the downside, if the price falls below the peg, things get more complex. We rely on a similar, but further controlled, arbitrage loop to support the peg.

  • If the reserve value covers 100% of the stablecoin supply, as should be the case most of the time, then this arbitrage loop is unlimited. Stablecoins can then be bought on the market and redeemed for $1 worth of reserve assets.
  • If the reserve value falls below 100% cover, then the peg is supported by the alignment of incentives among users and speculators in a currency peg game.

Peg defence by economic design

Gyroscope is explicitly designed to deter speculative attacks on the peg.

First, in times of crisis, it makes it in users’ interest to wait to redeem rather than sell at below par-value. By waiting, users will get a more favourable redemption rate. In turn, this makes any speculative attack less profitable.

At the heart of this design is an economic game. The intuition is as follows.

Users form beliefs about the fundamental value of the stablecoin. These are based on the value of the reserve and how widely accepted and used the stablecoin is. But users also form beliefs about the beliefs of other market-participants (and so on). Gyroscope coordinates these beliefs. Since the value of the reserve is observable on-chain, as well as the rules governing how it will be used, rational users then implicitly agree on whether to attack or defend the peg since they only win by being in the majority.

As a result, with a big enough reserve and with enough acceptance of the stablecoin, the value of the stablecoin will be stable at $1 in a wide range of market conditions. While the peg could break in extreme settings, by design the reserve is difficult to deplete in the short to medium run, and — provided the cryptocurrency ecosystem recovers — will eventually recover.

What sets Gyroscope apart from other stablecoins

Unlike existing non-custodial stablecoins, the stability of Gyroscope does not depend on the demand for leverage.

Let’s take Dai as an example. Its stability depends on a mechanism to balance the demand for leverage with the demand for Dai, as well as a liquidation mechanism, which requires liquid markets. The major downside of this approach is that when liquidity or the demand for leverage dries up, such stablecoins can enter death-spirals, such as on Black Thursday. In addition, as Dai has evolved, it has become increasingly dependent on exchangeability with USDC, explaining its recent relative stability.

Then turning to custodial stablecoins, such as USDC, these face tangible risks of being shut down. Transfers could be suspended and users restricted to redeeming stablecoins through particular banks/jurisdictions and not all users may be able to do this.

Yet other stablecoin designs such as Basis Cash and Empty Set Dollar (also in the past NuBits) rely on speculators who continue to bet on continual growth in the money supply. Additionally, these protocols give away all proceeds from new issuance to other speculators, who perform little function.

Why haven’t we seen something like this before?

In practice, it’s difficult to replicate the functionality of a central bank that maintains a peg on-chain. Maintaining a peg typically requires the financial might and soft-power resources of a state. Such resources don’t exist in the DeFi setting, and the available toolkit is smaller. While there have been several attempts at pulling this off, these attempts did not address all the central design challenges.

There are two main challenges in maintaining a peg on-chain. Firstly, the stablecoin is pegged to an asset (USD) which cannot be held directly on-chain. Whereas USD could be held in reserve by a central bank, the reserve assets available in DeFi are inherently riskier. Secondly, due to the transparent, programmable and pseudo-anonymous nature of blockchains, speculative attacks on a currency peg can be undertaken at great speed, potentially swiftly destabilizing the currency.

Gyroscope solves the first problem by designing the reserve such that the risks in the reserve are carefully stratified. It solves the second through new AMM designs. See the whitepaper for more information.

Why the world needs a non-custodial stablecoin

We foresee two main user groups that would stand to immediately benefit from Gyroscope, aside from speculative uses.

Firstly, crypto-native businesses will be able to use Gyroscope for treasury management, without needing to rely entirely on banking infrastructure or other stablecoins with centralization risks. With first hand experience of the tribulations of trying to set up a bank account for a crypto-native business in the UK, we know that this is a real problem to be solved.

Secondly, a non-custodial, censorship resistant stablecoin will be useful for households in unstable markets and geographic regions. It provides a means for value to be stored, offering a savings alternative, with a reduced prospect of sharp devaluations, and without restrictions on the movement of capital or confiscation of funds.

The team

We’re three PhD students from Cornell and Imperial College London, specializing in blockchain research.

We have worked toward making DeFi stronger for more than three years, since before the term “DeFi” itself was minted. We have researched and modeled many pioneering aspects of the DeFi ecosystem, including the technical and economic security of DeFi systems.

Along the way we’ve learned, and hope the community has learned with us, how DeFi can be stronger. We have now decided to put this knowledge into production by building the stronger DeFi that we envision.

We started designing an early iteration of Gyroscope at the IC3 bootcamp, winning first place. We refined this into a whitepaper released in December, and the testnet released today.

We work with a number of collaborators.

Our partners

We are partnering with Balancer and are very grateful for their support. Our secondary market AMM requires being able to implement customized AMM logic, and Balancer V2 is the only protocol that enables complex such customizable AMM logic out-of-the-box.

We have not yet sought to raise VC funding and have made it this far with grant funding.

What’s next?

We will be developing a fully functioning version of Gyroscope V1 for mainnet audit and launch in the coming months.

And we do not currently have a token, so please don’t fall for any scams.

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