July 3, 2019 — Launching today, the new research and development division of the Equilibrium framework, Equilibrium Labs, will begin work on developing new concepts in decentralized finance, with the aim of creating revolutionary price-pegged algorithms which will bring enhanced liquidity to the crypto market.
This division is the R&D arm of the Equilibrium framework, which has already successfully launched its EOSDT stablecoin. At this early stage, Equilibrium Labs is completing research and improvements on the Smart Token stablecoin algorithm recently proposed by Daniel Larimer.
Larimer, a software developer and serial cryptocurrency entrepreneur, created the delegated proof of stake consensus mechanism, and is well-known for his work on the EOS blockchain amongst others. In an April 2019 Medium post, he describes a new token pegging algorithm that allows for high liquidity and narrow spreads.
Smart Token Stablecoin Algorithm for EOS
The proposed algorithm has many advantages. It creates a virtual decentralized “bank” for stablecoins, and participants will be able to buy shares of its income (as a stake) and make a profit from commissions.
The institution will also be able to buy back the depreciated stablecoins from third-party exchanges. This approach is excellent for combating the hyperinflation and high interest rates we so often see in the crypto market.
But the algorithm is not without some crucial drawbacks. Larimer called his algorithm “market making” but included no mechanism for profit-making on a stablecoin’s stakes and rates. Additionally, the algorithm significantly degrades its performance in cases of price shock, when the price changes dramatically.
It can be caused by hyperinflation in cases where the value of the collateral backing the tokens soars, or by system insolvency in cases where the collateral loses its value slowly over time (or in a black swan event). As a result, the market makers waste their money because the “virtual bank” spends its reserves to support the stablecoin’s rate.
Equilibrium Labs works to Enhance Larimer’s Solution
Equilibrium Labs will analyze and suggest ways to enhance Larimer’s solution. It is necessary to reward the market maker for the inventory risk (risk of asset depreciation) and to protect them from abuse in situations where there is a prolonged price deviation. This implies a mechanism for market makers to be able to monitor the prices of the asset, have an opportunity to set their own prices, and the ability to compete for them.
Once that work is complete, Equilibrium Labs will turn its attention to developing ways in which to integrate the Equilibrium framework’s Native Utility Token (NUT) into this concept. That will help NUT achieve widespread adoption as a universal asset, accepted both as an internal currency and as a governance token by all Equilibrium Labs projects.
Equilibrium considers Larimer’s algorithm a compelling way in which to smooth out the volatility so commonly associated with crypto investing and transacting. With new systems to keep token prices stable, the crypto market can more easily make the transition into the mainstream.
Equilibrium Labs is also pursuing the idea to involve the crypto community in shaping and designing new pegging algorithms, creating fair and reliable mechanisms for the stablecoin market that will open more market opportunities for new decentralized finance businesses.