For everyone patiently waiting, the wait is over. XStable is here and we are finally ready to launch. In this article, I will dig into what XStable really is, how it operates, the story behind it, and the internal mechanics that drive it.

Over the past few months, I have been deeply fascinated with several algorithmic stablecoins that have stemmed in the cryptoverse but was not satisfied with the basic premises that these have been built upon. Ampleforth, ESD, FRAX, and several other stablecoin protocols have been born with one core premise, that an asset needs to follow another asset (“pegged”), at least in principle, to become stable. This in itself is a fallacy. Each of the global fiat currencies are relatively stable in their value, but not because they are pegged to each other or backed by each other. In the real world, these currencies are used globally creating demand and supply, and are traded in free-floating markets to satisfy these requirements. When supply or demand shocks originate, central banks constrain the supply by increasing the interest rates or expand the supply by decreasing interest rates and printing more money. Fixed exchange rate regimes have suffered trade-offs with stability compared to floating rate regimes with inflation targeting monetary policies.

In my view, a stable coin protocol does itself grave injustice by looking at the price in terms of another asset and trying to follow it. In contrast, what should be done is to look at the underlying economic factors that impact its own price and smooth supply and demand shocks akin to a central bank to achieve stability. This is the core premise of XStable and what has led to its genesis.

How XStable works

The protocol works to achieve stability by looking at the primary fundamentals of demand and supply, as I believe it should be.

However, as can be inferred, there are a couple of caveats that are not addressed in the core mechanics above. In the case of excess sell pressure, the protocol only incentivizes holding off on the sell but does nothing to increase the buy pressure in the above-described form. Let us look at a real-world scenario where demand for a currency has steeply plummeted and hyperinflation is on the horizon.

Pure monetary policy can only do so much in case the currency does not really have use and no real demand exists. Even in cryptoverse, speculative demand can only account for so much and is short-lived. In such a scenario, sell pressure eventually wins out while the community moves on to the next shiny apple. Real demand is generated via utility, and in my opinion, a real stable protocol should plan and should be positioned for this. In today’s cryptoverse, utility primarily rests in being used in defi protocols. Let us look at a couple of the existing top algorithmic protocols to understand what is lacking here.

a. Ampleforth/Rebase protocols — A token with oscillating balances. It becomes really tough to be used either as collateral or a lending asset while its balances move about steadily. Protocols record your deposit amount at the time of your deposit to put your money to good use. However, when the balances themselves can oscillate, it becomes incredibly difficult to actually put this to use, unless those protocols change the way they work altogether.

b. ESD/Seigniorage protocols — In the case of seigniorage protocols, your balances are stable which is a good thing. However, the incentive for a token holder to actually utilize the tokens in defi protocols, even if such an option is available is completely absent. In reality, it is the opposite. You have full incentive not to participate elsewhere. In case of an expansion cycle, unless your tokens are staked in DAO or at particular defined locations, you do not get to be a part of the supply expansion and lose out on your equity.

As such, both of these models only operate to gain speculative demand and once that wanes, they will track 0 instead of their targeted price pegs. XStable counteracts both of these negative aspects.

This forms an initial base for generating real utility driving real demand for XST. As we enter more advanced stages, we will be uncovering more of our planned roadmap, that will outline how we move from sell-side penalty to buy-side incentivization in case of imbalanced sell pressures. We will also be unveiling more complex financial products that are centered around the XStable ecosystem. This is just the beginning. Let us see how far innovation takes us.

A synthetic stablecoin protocol that derives it's supply and price values from true market demand.