Many people have asked for a post-mortem on USDf and here is the core team’s analysis.
USDf started off very strong and because of high APYs with farming, liquidity began building up very nicely.
With basically a non-existent USDf supply, users could only get USDf from minting 1-1 with USDC or buying on the open market. When USDf’s 1-H TWAP > $1, the CR (collateral ratio) would drop by 0.5% and vice versa.
Ultimately, as more and more USDf were minted, and the CR dropped, to get the arbitrage opportunity of selling USDf, new users had to buy Gaia, pushing up the price of Gaia and making the APY that much more attractive.
The CR dropped and dropped until hitting a low of 57%, upon which some users began to withdraw their principal and earnings. As much as the CR being lowered helped increase the APY, withdrawing USDf and minting more Gaia did the opposite. As users began to withdraw USDf, any gaia minted would be sold directly for Gaia -> USDf -> USDC -> ETH. This would decrease the price of Gaia and subsequently the APYs, meaning more withdrawals and removals of liquidity.
Ultimately, the idea of fractional-algorithmic style stablecoins are the future but it is very important to lower the CR gradually. As a matter of comparison, Frax’s CR is roughly 85% at the time of this writing, meaning that roughly $15M of FRAX is backed by FXS, which is value at around $75M.
It is imperative that the total amount of algorithmic backing must always be multiples less than the total market cap of the algorithmic asset.
The problem with USDf is that at a $13M marketcap, a 57% CR implies a 43% backing of Gaia (roughly $5.59M in value), whereas the total MC of Gaia was roughly the same if not slightly less.
If USDf were to be done again, it is imperative to set the initial guardrails much higher (ie CR minimum to be 95% or something similar) and allow Gaia to be given a fair market cap, multiplies higher than what it is backing.
The game theory bet is that if everyone were able to liquidate their USDf in one transaction, that the Gaia minted would be able to be redeemed into Gaia very close to a $1 par value. If not, then the house of cards will fall.
Given this analysis, while it is unfortunate what happened in USDf, it is a great lesson for all those in crypto trying to build algorithmic stablecoins. Please remember that while USDf did not 100% work out, that this is an experiment and most experiments don’t become wildly successful.
There are a couple routes from here.
1: keep the current USDf setup and see where it goes
2: re-launch USDf and Gaia under a new contract with sufficient guardrails (ie a minimum CR of 95%).