On Price Stability

There have been several attempts to create algorithmic stable coins, the overwhelming majority of which have lost their ability to remain at their stated peg. This page gives an explanation of why this is the case and how DJINN intends to avoid the same fate.

Shares and Bonds

Shares and bonds both represent confidence that the token will achieve a price point above the peg. In other words, to participate in either mechanic means that you believe there is demand for the token itself.

While the purchase of bonds decreases the supply, they represent a greater future expansion of the supply, therefore the bond mechanism cannot itself bring the price back to the peg. It is only able to accelerate the speed at which the price returns to the peg.

Central Banks

Functionally, the stable coin protocols in existence act as central banks for the defi economy.

National central banks issue currency which is backed by the functionality of a country's economy. Currencies remain in demand so long as they can be used to buy and sell goods and services. In order to prevent runaway inflation from the continuing issuance of currency, government can create taxes in order to reduce the supply.

Simplified model of central bank and economy

Nearly all transactions within a geographic region are done using the local currency. This provides two major advantages to the central bank model. Firstly, this creates a natural demand for the currency itself, backed by the nation's economy. Secondly, taxes can be imposed on a range of activities to help reduce the supply.

While the defi space is entirely incapable of producing geographic monopolies, these concepts of 'local economy' and 'taxes' can be translated back to algorithmic stable coins.

Defi 'Local Economy'

A defi local economy can be thought of as a family of projects produced by the same team which operate on a single base token. Not all projects and transactions which use that token are part of the local economy, much like transactions in USD outside of the US are not part of the US economy.

Within this local economy, it is then possible to generate natural demand for the token itself. Because the projects are produced by the same team, it is also possible to effectively collect taxes from the various profits generated by each project. Like in the national central bank model, these taxes can be used to reduce the supply of the currency.

Defi local economy model

The external economy represents projects which interact with DJINN but are not directly produced by the team. Currently, the external economy is only comprised of pancakeswap, however future partnerships are planned! In a strictly technical sense, the distribution pools can also be considered part of the external economy.

Plans for the local economy will be discussed in the next section.