Rational Ponzi Game in Algorithmic Stablecoin

Algorithmic stablecoins (AS) are one special type of stablecoins that are not backed by any asset. They stand to revolutionize the way a sovereign flat operates. As implemented, AS are poorly stabilized in most cases; their prices easily deviating from the target or even falling into a catastrophic collapse, and are as a result often dismissed as a Ponzi scheme. However, what is the essence of Ponzi? In this paper, we try to clarify such a deceptive concept and reveal how AS work from a higher level. We find that Ponzi is basically a financial protocol that pays existing investors with funds collected from new ones. Running a Ponzi, however, does not necessarily imply that any participant is in any sense losing out, as long as the game can be perpetually rolled over. Economists call such realization as a rational Ponzi game. We thereby propose a rational model in the context of AS and draw its holding conditions. We apply the model to examine: whether or not the algorithmic stablecoin is a rational Ponzi game. Accordingly, we discuss two types of algorithmic stablecoins (Rebase & Seigniorage Shares) and dig into the historical market performance of a number of impactful projects to demonstrate the effectiveness of our model.