Dynamic Set Dollar

Dynamic Set Dollar (DSD) is an algorithmic stablecoin deployed on the Ethereum blockchain. It operates without collateral backing, relying instead on a self-stabilising mechanism that adjusts supply based on market conditions. The protocol uses an oracle-driven pricing model to determine the Time-Weighted Average Price (TWAP) of DSD and modifies supply accordingly. If the TWAP price is above $1, the supply increases, whereas if it is below $1, the supply contracts.

Although the protocol was designed to maintain a value of $1, available market data suggests that it has not consistently achieved this in practice. DSD’s price has experienced significant fluctuations, at times reaching as high as $3 and falling as low as $0.27. The ability of algorithmic stablecoins to maintain their peg depends on market incentives and liquidity dynamics, and in DSD’s case, these mechanisms did not result in sustained stability.

While the project remained active for several months following its launch, the last significant update appears to have been published on April 1, 2021, with the DSD V2 Final Specs announcement. Since then, there have been no known updates, and trading activity suggests that the project is no longer actively maintained.

DSD aims to maintain a price of $1 through a combination of supply expansion and contraction mechanisms. The protocol operates on a system of epochs, with 12 epochs per day (one every two hours). At the end of each epoch, the TWAP price of DSD determines whether the supply should expand, contract, or remain the same.

• Supply Expansion: If the TWAP price is above $1, additional DSD tokens are minted and distributed to stakers and liquidity providers. This increases supply, which, in theory, could bring the price back down towards $1. However, before supply expansion occurs, any outstanding Treasury Securities (TS) must first be redeemed.

• Supply Contraction & Coupon Mechanism: If the TWAP price is below $1, instead of immediately reducing the supply, the protocol mints debt in the form of coupons. Users could burn their DSD tokens in exchange for these coupons, which could later be redeemed for DSD at a premium once the price returned above $1. The idea behind this mechanism was to incentivise users to remove DSD from circulation, reducing supply and potentially pushing the price back up.

However, the coupon system presented challenges. Since the ability to redeem coupons depended on the price rising back above $1 within a set timeframe (typically 30 days), many holders were reluctant to burn their DSD, fearing they might not be able to redeem them later. This limited participation in contractions, making it difficult for the protocol to restore the peg.

• Voluntary Supply Adjustment: Unlike some algorithmic stablecoins that impose strict caps on supply changes, DSD employs a more flexible adjustment formula. This is designed to allow the protocol to react dynamically to market conditions.

Despite these mechanisms, DSD did not demonstrate a sustained ability to maintain its peg. Observers have noted that whales and speculators played a key role in price movements, and that the reliance on coupons to remove supply may not have been effective in re-establishing stability.

In early 2021, the project proposed DSD v2 (DIP-10), aiming to address issues with the original design, particularly regarding supply contraction mechanisms. The final specifications for v2 were released on April 1, 2021, confirming that the upgrade was implemented.

Key changes included:

• Replacing Coupons with CDSD: Instead of time-limited coupons, users could burn DSD to obtain CDSD, which would be tradable and transferable without expiration.
• Earning Contraction Rewards: CDSD holders who locked their tokens in the DAO would receive rewards during contraction periods, creating an ongoing incentive to reduce circulating DSD.
• Partial Redemption Mechanism: Unlike the previous system where some users could redeem their entire holdings at once, CDSD redemptions would be distributed proportionally, ensuring more equitable access to expansion rewards.
• Incentivising Bonded DSD Holders: A capped 25% APY was introduced to encourage participants to remain bonded, even during contraction cycles.
• CDSD Liquidity Pool: The introduction of a CDSD-USDC liquidity pool aimed to provide exit liquidity during contraction cycles, preventing reliance on DSD as the sole exit mechanism.

With DIP-10, the team sought to create a more balanced system where expansion and contraction incentives were better aligned. However, despite the implementation of DSD V2, there is no evidence of sustained adoption or long-term stability. The lack of further updates and the current trading data suggest that the project was eventually abandoned.