Dynamic Set Dollar Peg Lost

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Dynamic Set Dollar

The Dynamic Set Dollar was a stablecoin based on Empty Set Dollar with modifications. It was launched on November 30th, 2020. The value ended up not remaining stable, fluctuated wildly in December, and eventually collapsed and failed to recover in January 2021.

This is a global/international case not involving a specific country.

About Dynamic Set Dollar

"We are excited to introduce Dynamic Set Dollar: a next-generation elastic supply stable token that, by improving upon its predecessors through the integration of several novel features, is destined to become the first fully DeFi compliant stablecoin." "DSD is a decentralized self-stabilizing and censorship-resistant stablecoin without any collateral backing. Oracle-driven pricing for voluntary supply elasticity is used without having to trust third-parties."

"DSD uses the mechanics from several other projects and is mainly inspired by ESD, Empty Set Dollar. ESD set a strong foundation for being the first viable non-collateral backed stablecoin design. Yet, governance proposals and protocol changes negatively influenced its growth and did not meet the expectations of its early participants. Therefore, we are launching DSD, which aims to serve as a rolled-back version of ESD incorporating slightly adjusted parameters to be even more agile and respond even quicker to market demand."

"The ideal DeFi stablecoin would be fully decentralized, capital efficient and censorship-resistant. We, an anonymous team and strong supporters of non-collateralized stablecoin designs created DSD to do all of these things, and more."

"To encourage users to buy coupons, the Empty Set Dollar system sets an enticing exchange rate between ESD stablecoins and coupons, say 1 ESD stablecoin to 1.1 coupons. So if you own 10 ESD stablecoins, and their price falls below the $1 peg, the system will let you convert your 10 ESD stablecoins into 11 coupons. When (or if) the price of ESD stablecoins rises back above $1, you’ll be able to reconvert your coupons into 11 ESD stablecoins. Voila, your 10 ESD stablecoins have become 11, for a 10% profit."

"Got that? A coupon, in short, can be thought of as a promise to pay even more ESD stablecoins in the future, conditional on locking up one’s ESD stablecoins now, but only if and when the $1 peg has been restored."

"The further that the price of ESD stablecoins falls below $1, the more enticing the system-set conversion rate into coupons gets. Put differently, the more that it fails, the more the algorithmic stablecoin system tries to harness forces to repair itself."

"This all sounds good in theory, but what about in practice? Luckily for us, algorithmic stablecoins aren’t just ideas jotted down on paper. ESD debuted last September and is providing real data on how these things function. A second algorithmic stablecoin has joined it. Dynamic Set Dollar (DSD), a clone of ESD, hit the pavement running in late November."

"Both algorithmic stablecoins have proven to be popular. At their peaks in late December 2020, ESD and DSD had respectively issued $550 million and $300 million worth of stablecoins into circulation."

"How close did their prices hew to $1? For the first few months, the pegging mechanisms seemed to work. When ESD or DSD rose above $1, new coins were created, driving their prices back down. And periods of sub-$1 prices were successfully fixed, too, with the aforementioned coupon freezing mechanism pushing them back up to $1."

"Dynamic Set Dollar, an 'algorithmic stablecoin' that plunged to 28¢ a few days back, has swung back up to its $1 reference point. Good for it, but I'm not sure that "stable" is the appropriate adjective."

"However, since late December the price of ESD has gradually fallen to 23 cents. DSD stablecoins have fallen to 24 cents. There is little indication that either will ever return to $1. The value of ESD is presented in Figure 1. The value and volume of DSD is presented in Figure 2."

"Dynamic Set Dollar hits 26¢. So is it game over for the algorithmic stablecoin experiment? Or just back to the drawing board?"

"Coupons have been proven ineffective to recover the 1$ peg. This is mostly caused by the pricing of the coupon being too static due to the fact that the duration they are held is completely neglected. This incentivizes buying coupons once the price re-approaches peg and not when it deviates away, which is when contraction is most needed."

"The DSD treasury proposal just successfully passed. This opens up a new chapter for the Dynamic Set Dollar protocol, and provides important resources to scale the team and project even further."

"After one of the most successful launches in DeFi history, it is time for the DSD economic experiment to advance into the next epoch. Improving on the existing mechanics and setting the cornerstones for a stable, reliable, and scalable store of value for the decentralized economy."

"Therefore, with DIP-10 we are going to revamp the entire incentive design of DSD. The new contraction cycle mechanics introduced by DIP-10 are a significant step towards becoming the first non-collateralized algorithmic stablecoin that can sustainably maintain its peg."

This is a global/international case not involving a specific country.

The background of the exchange platform, service, or individuals involved, as it would have been seen or understood at the time of the events.

Include:

• Known history of when and how the service was started.
• What problems does the company or service claim to solve?
• What marketing materials were used by the firm or business?
• Audits performed, and excerpts that may have been included.
• Business registration documents shown (fake or legitimate).
• How were people recruited to participate?
• Public warnings and announcements prior to the event.

Don't Include:

• Any wording which directly states or implies that the business is/was illegitimate, or that a vulnerability existed.
• Anything that wasn't reasonably knowable at the time of the event.

There could be more than one section here. If the same platform is involved with multiple incidents, then it can be linked to a main article page.

The Reality

This sections is included if a case involved deception or information that was unknown at the time. Examples include:

• When the service was actually started (if different than the "official story").
• Who actually ran a service and their own personal history.
• How the service was structured behind the scenes. (For example, there was no "trading bot".)
• Details of what audits reported and how vulnerabilities were missed during auditing.

What Happened

The specific events of the loss and how it came about. What actually happened to cause the loss and some of the events leading up to it.

Key Event Timeline - Dynamic Set Dollar Peg Lost

Date	Event	Description
January 28th, 2021 5:03:00 AM MST	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.

Technical Details

This section includes specific detailed technical analysis of any security breaches which happened. What specific software vulnerabilities contributed to the problem and how were they exploited?

Total Amount Lost

The total amount lost is unknown.

How much was lost and how was it calculated? If there are conflicting reports, which are accurate and where does the discrepancy lie?

Immediate Reactions

How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?

Ultimate Outcome

What was the end result? Was any investigation done? Were any individuals prosecuted? Was there a lawsuit? Was any tracing done?

Total Amount Recovered

There do not appear to have been any funds recovered in this case.

What funds were recovered? What funds were reimbursed for those affected users?

Ongoing Developments

What parts of this case are still remaining to be concluded?

General Prevention Policies

Algorithmic stablecoins face a fundamental issue with the requirement of faith in their value. Preparing a stablecoin requires scrutiny and expert opinions. Some funds should be available to assist victims in the event of collapse.

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.