Design and Implementation of an Improved Algorithmic Stablecoin

Abstract

Cryptocurrency markets are inherently volatile, underscoring the critical need for stablecoins as a reliable medium of exchange and store of value. Existing algorithmic stablecoins are poorly succeeded on maintaining the peg and often suffer from the "death spiral" effect during extreme market downturns, ultimately failing to maintain their peg. This lack of reliable stability in the absence of collateral poses a significant challenge within the De-Fi space. This project introduces USDX, a novel algorithmic stablecoin designed to overcome traditional vulnerabilities and achieve enhanced stability without collateralization. USDX employs a three token system (USDX, ASTRIX, bASTRIX). Its primary pegging mechanism incentivizes arbitrageurs to maintain the USDX peg to the US dollar through price discrepancies between USDX and ASTRIX. Additionally, under extreme market pressure, USDX introduces a bond token mechanism (bASTRIX) that aims to mitigate panic selling and prevent the death spiral by offering a redeemable bond option only when USDX maintains its peg. USDX underwent rigorous simulations across normal and 'black swan' market conditions. Results demonstrate that USDX maintains its peg more effectively than benchmark algorithmic stablecoins, especially during periods of volatility. The introduction of the bond token system shows particular promise in mitigating extreme market pressure. This project suggests that USDX's unique combination of pegging mechanisms has the potential to bolster resilience and contribute towards the development of more reliable algorithmic stablecoins.