The past year has seen a barrage of new algorithmic stablecoins. The majority of these projects either peg their token to some nominal value, such as $1 (e.g. ESD and, more recently, FEI) or something unpegged but relatively stable like RAI and OHM. The goal of these projects is to provide a decentralized stablecoin that is capital efficient.
They try to accomplish this through protocol mechanics as opposed to the large collateralization used by established projects such as DAI.
This influx of algorithmically stabilized coins (“algo stables’’) has had more failures than successes. A further review of these experiments will be released in a separate article in the coming days.
For now, let’s discuss a promising solution to the algo stablecoin dilemma. Malt is an inventive new project that innovates on existing concepts to achieve a capital-efficient token that can be effectively pegged to any value ($1 is chosen for initial simplicity). More information will be released in the coming days about how the Malt algorithm achieves stability. But a more common question is, “How do I profit from a stablecoin?” It is a fair question that needs a repeatable solution if the project is to survive.
Not all algo stables benefit holders in the same way, but there are two primary ways to profit on Malt:
- Bonding LP — Farming LP tokens from the Malt + “Other” AMM pool (e.g. Malt/DAI LP pool) and then receiving rewards in the “Other” token every time Malt climbs above peg. While the price remains stable LPs receive a fixed APY in Malt.
- Arbitrage Auctions — Pledging the “Other” token to arbitrage auctions when the price dips below peg, rewarding the owner with a premium also paid in the “Other” token.
To facilitate this, Malt has a form of protocol-controlled value that we call “Liquidity Extension.” The specifics of how this works will be detailed in the coming days. But let’s discuss the basics of how Malt works for the end user.
Users who provide liquidity to Malt pools on an AMM will be able to bond their LP tokens to receive rewards for providing liquidity. Initially there will be a single Malt/DAI pool, which means all LP rewards will be paid in DAI. In the future there will be other pools likeMalt/ETH, for example, that will pay rewards in ETH. This will allow Malt holders to choose the token they are paid in, incentivizing increased liquidity for pairs in high demand. Malt holders also have no incentive to dump their position since all profits will be in the other token.
An additional benefit is that there will be no lockup on any rewards. Once rewards are visible in the account, they can be immediately withdrawn or reinvested. (If you are an LP in the first week, you might get a little something extra, too, but shhhh — don’t tell anyone yet.)
Unlike other projects that include rewards for bonding to the DAO (e.g. DSD and ESD), Malt focuses on incentivizing LP providers, since high liquidity levels directly improve stability around the peg. The reward for LPs, then, is to safely grow stacks of whatever other token is offered on the platform.
These LP rewards take two forms: (1) rewards distributed to LPs when the price is pushed above peg, and (2) rewards distributed to LP providers after prolonged levels of stability at or around $1.
When price is pushed above peg, the protocol mints fresh Malt and sells it into the liquidity pool. The profits received from this sale are distributed to bonded LPs and to liquidity extension (more on this in another article). When price settles into periods of stability where the protocol doesn’t need to mint new Malt to stabilize itself, the protocol will issue a fixed APY paid in Malt to all bonded LPs. This APY is set via governance.
When an algorithmic stablecoin price rises above peg, pushing it down is generally easy, typically taking the form of minting and distributing new tokens, as is the case with Malt. However, the more significant challenge is recovering the price from below peg. Malt tackles this problem with multiple mechanisms (again, described in more detail in a coming article), one of which includes the opportunity to participate in a Dutch auction for arbitrage tokens (arb tokens).
Auctions for the arb tokens last for either 30 minutes or until a pre-specified amount of money is raised. The price of the arb token begins at $1 and decreases continuously across the 30 minutes, or until the desired capital is raised.
Arb tokens are then automatically redeemed for you by the protocol at an equivalent value of $1 per token. This offers a profitable premium on arb tokens purchased below $1. This Dutch auction ends when there is enough money, allowing the market to decide the premium on the arb tokens while increasingly incentivizing investors to buy in.
Arbitrage auctions happen on a per pool basis, meaning the Malt/DAI pool auctions are completely disconnected from the Malt/USDC pool, for example. All bidding is done in the non-native token in the pool, so, for the initial launch pool, DAI will be bid to capture a premium in the MALT/DAI pool.
When the auction is complete, the arb tokens are automatically and immediately redeemed for $1 of value in the non-native token of the pool. The automated redemption eliminates bot and gas fee wars from manipulating the protocol. All bids will then be used to buy Malt and burn it behind the scenes. Notably, though, this auction process is just part of the puzzle under peg. It combines with other Malt mechanisms to push price back to peg. This system is complex and will require a standalone article for explanation.
For now, investors should know that participating in the arb auction allows the opportunity to purchase a future dollar at a premium, similar to a bond but with the notable exception that it does not expire. Ever. It will be paid off at the earliest possible opportunity, however long that takes.
Exactly how Malt achieves this in a repeatable and responsible way without continuous supply growth will be detailed in upcoming articles on the algorithms providing the plumbing for Malt’s arbitrage auctions and liquidity extension.
This article is only an overview of the primary participant options for Malt: liquidity pool rewards and arbitrage auction premiums. The essence of Malt’s ethos is to achieve easy participation and dependable profits based on a sophisticated formula that will keep Malt a top-shelf option in the growing stablecoin marketplace.
Look forward to our future articles which will dig deeper into the mechanisms that maintain Malt’s stability. As launch approaches, we will also release helpful step-by-step articles and videos on how to participate both in LP pools and arbitrage auctions.