Algorithmic Market Operations (AMOs)

Understanding Algorithmic Market Operations (AMOs)

Algorithmic Market Operations (AMOs) are a type of stablecoin that relies on algorithmic market operation modules to control its supply. Unlike traditional stablecoins, which are fully collateralized and backed by fiat, crypto, or on-chain tokens, algorithmic stablecoins utilize AMOs to automatically manage their supply. This approach offers several advantages, including scalability, decentralization, and transparency.

An example of a collateralized stablecoin is Tether (USDT), which has a market value of over $60 billion as of July 2021. However, algorithmic stablecoins, unlike Tether, do not require manual minting or burning to adjust their supply. Instead, they depend on AMOs to regulate the supply, reducing the need for centralized decision-making and minimizing the risk of human error and manipulation.

AMOs possess four key properties:

1. Decollateralization: This involves reducing the collateral ratio.
2. Market operations: This part of the strategy does not alter the collateral ratio.
3. Recollateralization: This involves increasing the collateral ratio.
4. FXS1559: This refers to the precise amount of FXS that can be burned while still maintaining profits above the targeted collateral ratio.

To maintain stability, if the price of a stablecoin exceeds its peg, the collateral ratio is lowered, and the supply expands. Conversely, if the collateral ratio becomes too low and the stablecoin loses its peg, the AMO can utilize the recollateralization operation to increase the collateral ratio.

AMOs can be described as a “mechanism-in-a-box,” enabling anyone to build an AMO as long as they adhere to the specifications. These stablecoins employ complex algorithms in their smart contracts or algorithmic operated market controllers to adjust their circulating supply. This capital-efficient approach allows the stablecoin to issue additional coins when the price rises and burn them off when the value drops, eliminating the need for collateral backing.

Examples of algorithmic stablecoins include Basis Cash and Empty Set Dollar. These stablecoins offer a novel approach to stablecoin design, combining algorithmic control with decentralized finance.

Author:

Sam Kazemian is the founder of FRAX, a fractional algorithmic stablecoin that is partially backed by collateral and stabilized algorithmically. FRAX is an open-source and permissionless stablecoin that has maintained its peg since its inception. Kazemian is a leading blockchain entrepreneur and crypto enthusiast, with experience as the co-founder of Everipedia. He is also a frequent guest lecturer at UCLA, covering topics such as crypto, computer science, and entrepreneurship.