Understanding Algorithmic Market Operations (AMOs)
When it comes to traditional stablecoins, the concept is relatively straightforward.
The most common type is fully collateralized stablecoins, backed by fiat, cryptocurrencies, or on-chain tokens that can be redeemed or exchanged.
Algorithmic stablecoins, on the other hand, operate differently. Instead of manual minting or burning to adjust the supply, algorithmic stablecoins rely on Algorithmic Market Operation modules (AMOs) for supply control.
AMOs offer scalability, decentralization, and transparency to the system.
A stablecoin is better positioned for growth and adoption by implementing an AMO solution.
AMOs eliminate the need for centralized decision-making by relying primarily on smart contracts, reducing the risk of human error and manipulation.
An AMO has four key properties:
- Decollateralization: Reducing the collateral ratio
- Market operations: Implementing strategies without changing the collateral ratio
- Recollateralization: Increasing the collateral ratio
- Determining the precise amount of FXS that can be burned while maintaining profits above the targeted collateral ratio
The Role of Automated Market Operations (AMO)
To maintain stability, if the stablecoin price rises above its peg, the collateral ratio is lowered, the supply expands, and the AMO controllers continue to function.
Conversely, if the collateral ratio becomes too low, resulting in the stablecoin deviating from its peg, the AMO can again employ predefined collateralization operations to increase the collateral ratio.
AMOs are “mechanisms-in-a-box”, allowing anyone to build and utilize an AMO by adhering to the specified guidelines.
These algorithmic stablecoins employ complex algorithms within their smart contracts or algorithmic-operated market controllers (AMOs) to adjust the circulating supply of their tokens.
This makes the stablecoin capital efficient, issuing additional coins when the price rises and burning them off when the value drops. It also eliminates the need for collateral backing.