Generation 2 Algorithmic Stable coins — How ZAI is much more than first meets the eye

5 min readJan 6, 2021

You may well have heard of Algorithmic stable coins, they were first presented to us by Empty Set Dollar and then by Dynamic Set Dollar. Since first landing on the market they have developed rapidly and significantly.

At the time of writing this article ESD has a market cap of ~360 million and DSD a market cap of 120 million (USD).

By definition; “An algorithmic stable (ASC) coin is a token that adjusts its supply deterministically (i.e. using an algorithm) in order to move the price of the token in the direction of a price target.”

In simple terms, ASC’s issue more supply when the price rises above price target and reduces the supply as the price falls below this.

This is managed via the utilization of coupons: if the price falls below the price target, holders can burn their native tokens for coupons. Then once the price goes back over the price target these can be redeemed for more than one.

Introducing ZAI:

ZAI is an empty set dollar fork with an epoch time of 30 minutes.
LINK TO INTRO ON ZAI.

Initially, traders were hesitant to invest in ZAI. This was mostly due to the misconception of it being “just another ESD fork”. But, it has quickly become one of the most attractive algorithmic stable coins on the market due to it’s powerful and relevant long term use-case. ‘What is the long term use-case?’, you may be asking…

To increase liquidity for DAI whilst remaining fully decentralized.

Why does DAI need ZAI:

MakerDAO’s DAI uses a combination of Ethereum, stable coins and tokens as collateral in an attempt to maintain the $1 price peg. But, as seen in the chart below, this is often not the case. DAI fluctuates relentlessly above and below it’s target $1 peg, rendering the ‘stable coin’ somewhat unstable…

It is imperative to ensure that there is continued provision of liquidity for DAI as a decentralized stable asset. Recently, the US Treasury has approved the use of stable coins (such as USDC) as legalized currency or tender (see here). Therefore, we could argue that DAI is becoming less decentralized as around one third of the collateral in circulation in MakerDAO vaults is USDC.

ZAI is a “Synthetic ASC” which implies it has more applications as a derivative (hedging against DAI volatility in this case).

So why does DAI need ZAI?

The ultimate utility for ZAI is to increase liquidity and stability for DAI long term.

How will ZAI achieve this:

After oracle integration, ZAI stops being JUST an Empty Set Dollar fork and begins to evolve into a synthetic protocol used as a hedge and dynamic supply backup for DAI (in terms of volatility + price).

Simply put; if DAI > 1 USD this will cause ZAI’s supply to expand. If the inverse occurs then ZAI’s supply will contract.

ZAI’s epoch time is a mere 30 minutes, which is significantly shorter than it’s predecessor’s. But, following more research it has become apparent that this functions less as a means for degenerate gains (unlike alternative forks) and actually serves real purpose. Given the early days of this project we have (so far) only witnessed expansion in ZAI. But, in future we will see consistent micro cycles of expansion and contraction due to the regularity of the 30 minutes epoch. This, in turn, will help to maintain the DAI $1 peg.

Creating a fully decentralized environment:

The ZAI developer is fully anonymous and you may ask, is this a red flag?

Initially, this may look like a cause for concern. However, this is actually a crucial and necessary decision. Creating any stable currency puts you at immediate legal risk, so remaining anonymous contributes to the decentralized nature of the protocol.

The entire protocol will be completely decentralized and open source thanks to Ethereum Name Service (ENS). More info on ENS can be found here.

The ZAI roadmap:

ZAI presents us a clearly mapped and well thought out road map. Dates have yet to be set, as the developer prefers to work without setting unrealistic expectations. However, recent developments have been rapid and successful.

You can view the full roadmap here.

Scalability:

One issue with algorithmic stable coins on the Ethereum network is the inconsistent and unpredictable fluctuation of fees. The process of bonding, un-bonding and claiming on the dashboards can be cumbersome and expensive. This is off-putting for new community members and creates elitism in trading. These member are essential to the community but may not be able to afford extortionate gas fees in the early days of trading.

Scalability is a top priority for ZAI and they have contingency plan already in place to integrate zkRollup for $0.001 fees. This means that interacting with ZAI’s user friendly interface would also be extremely low cost; win win.

This is important as it creates an environment where the community can continue to grow and strengthen the network.

Development fund:

100% of the ZAI bonded by the deployer address will be pledged to the community as an initial treasury to fund ongoing development.

A multi-sig account created and owned by community members will be used to determine the deployment of these funds and also means that the project can be rapidly accelerated without minting more ZAI.

Tips for contributing to/interacting with ZAI and FAQ:

The growth of the ZAI community is crucial to it’s success. If you have questions or would like to get involved in the conversation around ZAI’s use case, community and projects.

JOIN THE ZAI FINANCE COMMUNITY HERE.