Learn about Gyroscope in one article: a stable rookie starting from the Polygon ecology

Gyroscope has its own reserve pool, and its stability mechanism is maintained by two modules: AMM in the primary market and AMM in the secondary market.

Written by: Cabin VC

One, Gyroscope

The stable currency agreement Gyroscope released a white paper last year. Based on this agreement, GyroStable recently cooperated with Balancer to launch a centralized liquidity strategy, and built a market-making model and market-making strategy management for LST assets in the Polygon ecosystem. Gyroscope has launched three types of CLP (Continuous Liquidity Pool) on Polygon, and received market attention last week, and launched $stMATIC / $wMATIC about two weeks ago.

(Data source: defillama)

According to defillama, its current TVL is $735,763, and minted Stablecoins are $593,63.

(Data source: defillama)

1) Stabilization mechanism

The core part of Gyroscope is a protocol for minting meta-stablecoins. The ideal Crypto stablecoin market does not want to rely on central bank digital currencies or centralized stablecoins. This requires the flexibility, design, and value transfer of decentralized stablecoins. make appropriate innovations. GYD, created by Gyroscope, is fully backed by reserves, enabling collateral diversification and increasing its liquidity:

The stablecoin of the Gyroscope protocol is GYD, whose collateral is collateralized by many interrelated but independent Vaults. Vault comes from Balancer's pool of various assets (other stablecoins are preferred initially). This method can be regarded as an innovation and supplement to Maker and DAI:

A: Full Asset Reserve Stablecoin: Each unit of stablecoin is backed by $1 worth of collateral and aims to achieve a 100% long-term reserve ratio.

B: Reserve Fund: The reserve fund consists of a "basket" of assets controlled by the agreement, which collectively provide collateral for the issued stablecoins.

C: Algorithmic Price Constraints: Prices for minting/redeeming stablecoins are algorithmically set for balance and to be able to handle short-term crises.

Its collateral consists of a basket of other assets, including other stablecoins, yield-generating instruments, or volatile assets, initially backing stablecoins denominated in U.S. dollars, and adding other categories of stablecoins (including euros, yen, etc.) :

This "layering" of reserve assets is designed to allow for a resilient reserve design that allows for "safety failures" of individual vaults, where a single point of failure does not pose a risk of overflow to other vaults.

2) Protocol design

Gyroscope has its own reserve pool, and its stability mechanism is maintained by two modules: primary market AMM (PAMM) and secondary market AMM (SAMM):

PAMM：

PAMM provides quotations for the casting and redemption of the stablecoin GYD, and takes into account the impact that may be received under abnormal conditions. In order to mint, users must deposit backed collateral assets into one of Gyroscope's various vaults, and users will mint stablecoins 1:1 (minting fees are not considered).

STEP：

SAMM is a secondary market AMM that provides core liquidity for the Gyroscope protocol. CLP is similar to the centralized liquidity design of Uniswap v3, but by customizing the Balancer v2 pool, the liquidity is concentrated within the price range of PAMM to achieve higher capital efficiency.

SAMMS provides a diversified liquidity network around GYD, as shown in the figure below:

There are three types of GYD trading pools:

2-CLPs: AMMs that concentrate liquidity within a pricing range, the parameters are determined by the pricing range [α,β] and the two assets in the pool

3-CLPs: Concentrate liquidity between three assets to improve capital efficiency

E-CLPs: Used in the GYD trading market, it is a fund pool for GYD to be paired with other assets

The GYD trading pool follows the price range defined by DSM to concentrate liquidity. In the case of healthy reserves, the GYD trading pool concentrates liquidity in a narrower and reasonable range. This price range will widen if a shock to reserves triggers DSM to set new redemption prices.

The GYD transaction pool is redundant (providing multiple different entry and exit paths for Gyroscope stablecoins) and independent of each other (assuming one of the asset pairings fails, the remaining SAMM transaction pool can still operate normally, unlike Curve's single pool).

Gyroscope's Dynamic Stabilization Mechanism (DSM):

Unlike existing non-custodial stablecoins, Gyroscope's stability does not depend on the need for leverage. Gyroscope has no central issuer, users can mint and redeem directly in the agreement, and there is no counterparty.

The DSM (joint curve citing mint/redemption prices) depends on the current reserve ratio and outflows:

Under normal circumstances, users mint stablecoins and redeem reserve assets 1:1 (minting/redemption fees are not considered).

Redemption with a mortgage rate close to 100%: When the reserve is lower than the 100% mortgage rate, PAMM will automatically redeem GYD at a ratio lower than 100% of the collateral value. That is, the redemption curve starts around $1, and GYD trades around $1, achieving good liquidity.

Redemption with a mortgage rate much lower than 100%: If the redemption continues and the "outflow" increases, the second line of defense is algorithmic pricing, and the redemption curve will move to the "circuit breaker" stage, where the redemption rate will automatically Below the reserve ratio, the redemption offer is gradually reduced to ensure that redemptions are always possible (but still result in a write-down), and to prevent market panic flight and attacks on the currency anchor, while rewarding waiting for the short-term decline to pass User.

Other stabilization mechanisms include: Similar in logic to Maker's Peg Stability Module (PSM), the Gyroscope mechanism allows stablecoins to be exchanged for assets worth $1. Leverage lending mechanism available for undercollateralized reserves: This is similar to how MIM works, if the price of GYD falls significantly below $1 (as some market crashes do), leverage holders will be able to close their positions at a discount , which will reduce the supply of GYD, bringing the GYD price back to $1.

The last line of defense is the operation of the reserve fund. The reserve fund can be recapitalized by returning from an under-collateralized state to a fully-collateralized state through several mechanisms: such as auctioning governance tokens, income generated by reserve assets, income through agreements, etc.

Second, Analysis and Summary

Gyroscope's GYD trading pool E-CLPs can be regarded as a highly liquid DEX that can withstand a single point of failure in assets.

The stMATIC/wMATIC pool, as its first LST E-CLP, benefits to a certain extent from the maturity of the Polygon ecosystem. The liquidity utilization rate of Gyroscope E-CLP is about 2-3 times higher than that of other similar pools .

Compared with the reliability of the stablecoin mechanism, the use cases, scenarios and user expansion of the stablecoin are equally important. Based on its stabilization mechanism in the early days, Gyroscope has attracted discussion and attention in the primary market. After testing, choosing to start from Polygon, a mature ecology that has effectively undertaken a large amount of overflow from Ethereum, has the potential to become a fresh blood in the algorithmic stablecoin market and compete with Fei Protocol and others.

Considering the key role of the partner Balancer in promoting the centralized liquidity of assets such as $rETH, and the support of the new and effective flywheel provided by the LST protocol to liquidity. In the future, we need to pay attention to its in-depth entry into LST assets. Gyroscope's LST pool is expected to further improve the efficiency of the new LST market (including stETH, etc.). It is expected that more LST E-CLPs will appear in the future and take advantage of the Polygon ecosystem.