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RE: Alchemint (SDT) ICO Analysis: An NEO-based Stable Coin
Ha, a stable coin project! Even though there is definitely a demand for a decentralized 'unit of account' currency, I'm not sure what to think of the following:
However, if the price of NEO falls below a certain point, users have to invest more NEO tokens to make up for the loss. If they choose not to, Alchemint has the option of liquidating the collateral, and the user will have to pay additional fees.
How does that work? It sounds a bit strange to me since the whole idea behind a stable coin is that when the market drops significantly, this thing remains stable right? Could you elaborate a bit on this?
Thanks for another great analysis though!
Sure. It looks like these guys basically copied DAI model and transferring it to NEO. There are two tokens, a stable coin and a utility/security token. Stable token is indeed designed to be as close to USD as possible via CDP mechanism. Utility/security token is however volatile.
In DAI model there are two main parties in the game. The ones who post collateral to the system and take a loan against it, the creators of CDPs. These people benefit by using collateralized loan services and potential upside volatility of their collateral. However, they also bear the risk of downside volatility and a liquidation fee. E.g. I'm the borrower, I send 1 ETH at $400 to the system and create a CDP. I can borrow let's say 200 DAI from that CDP. To get back my 1 ETH I need to return back the borrowed DAI. However, if price of ETH goes down, in this case to $200 + liquidation and other fees, the system will need to liquidate my collateral to maintain price balance. It does so by sending my collateral (1 ETH) to a smart contract and selling it directly to arbitrage guys cheaper than it is on the market. The difference is covered by commission the CDP issuer pays for liquidating the CDP.
The second party is DAI buyer. He buys DAI on an exchange from CDP issuers and benefits from it being a stable coin. He doesn't bear any underlying volatility risks expect in cases where stability system breaks down and can't compensate for market action (So far maximum DAI/USD drawdown was around 13%, happened twice for less than a minute).
So the sentence you're quoting is talking about CDP issuers and not DAI buyers.
I haven't really dug deep into Alchemist model though, there might be some discrepancies with DAI, but it looks very similar so far.
Here are a couple of links to learn more:
https://medium.com/cryptolinks/maker-for-dummies-a-plain-english-explanation-of-the-dai-stablecoin-e4481d79b90
Wow, thanks for this in-depth explanation! I think I get it now. I will definitely watch that video :-)
This video I found particularly useful as well, maybe you've seen it already: