Turning debt into revenue: rethinking algorithmic stablecoins

I'm not particularly in favor of burning tokens, for a while now, it hasn't made sense to me why someone would want to eliminate a token whose value would remain accounted for in its market capitalization.

I'm not going to dive into how all algorithmic stablecoins work, most have unique qualities that makes them slightly different from others, but what I believe is consistent across all is the creation process of the stablecoins.

X tokens (usually the native asset) is burned to create the stablecoin (usually for what the burned tokens was worth).

I think that burning X tokens is a mistake. The obsession with creating scarcity without meaningful demand is the reason a lot of crypto projects have limited token supply (sometimes even more limited than bitcoin) but don't seem to grow.

They bet on the idea that people will want to invest due to a limited token supply, but as stupid as people can be generally, they are more interested in narratives: what are people saying about X token? is more important than what's on its whitepaper.

Focusing on revenue and liquidity

I believe that liquidity matters more than anything when it comes to tokens or assets. If a projects lacks any strong source of value inflow to grow its markets liquidity, it's doing all the wrong things.

It is more important to have deep liquidity than token scarcity, and guess what?

Chasing scarcity only pushes projects further away from achieving that deep liquidity.

I feel we should rethink what we do with tokens offered up to create stablecoins, which are debts by the way.

Burning the tokens is almost like burning a collateral. Yes, I know the tokens will be minted again when people want to redeem the stablecoins, but that's the thing, the whole point of having a debt instrument is that you want people to hold it. If at all they need to sell it, it should be into the general market, not an on-chain redeem.

So we don't want to focus on redemptions, we have to focus on how to make the ecosystem very valuable that debt creation leads to massive value generation for the project with limited risks.

Depending on the protocol or chain, instead of burning X tokens, I think that smart contracts should be designed to receive these tokens offered when creating native stablecoins and permanently stake(lock) them to earn native yield.

Earned yield should be deployed into markets as permanent liquidity, where earned revenue is re-deployed into the pool.

By doing this, each time a network creates debt, it slowly pays for it through native yield and swap fees. By doing this, a network will hardly ever be overvalued and growth will not be hype-based and lacking meaningful grounds.

Posted Using INLEO