1.3 Failure of the stability mechanism

#1 The "Unanchoring Spell" of Algorithmic Stablecoins

The core goal of protocols such as OlympusDAO V3 is to move tokens (such as OHM) around a "dynamic underpinning price", but its mechanism of "elastic supply is completely automatically executed by the system" is difficult to cope with complex markets. During the market panic sell-off, the system cannot issue additional tokens at the speed of the sell-off, resulting in the price falling below the underpinning price and unable to rebound. And when speculative funds pour in, the price will rise sharply from the underpinning price, forming a vicious circle of "boom and bust". For example, the price of OHM fell from $1,200 to below $100 in three months, and the stability was far less than expected.

#2 Single asset risk exposure

Stablecoins, such as MakerDAO's DAI, rely too much on a single asset (such as fiat stablecoins such as USDC) as collateral, leading to "centralized dependence under the guise of decentralization". When the USDC is de-anchored due to issues such as issuer regulatory risk and reserve doubts, the DAI will also fluctuate and even trigger a chain run. For example, when the USDC was briefly de-anchored to $0.87 in 2023 due to the Silicon Valley Bank incident, the DAI fell to $0.91 simultaneously, exposing the fatal flaw of single-asset collateralization - risk is concentrated and it is difficult to withstand systemic shocks.

[The "Hyperbolic Dilemma" of Algorithmic Stablecoins]: When market volatility (sigma) breaks through a critical value (e.g. sigma > 80%), the existing model exhibits a reflexive failure:

Rising cycle: Pmarket > PbackingPmarket > Pbacking → Protocol to issue additional tokens → Dilute value → Inflation spiral; Downside Cycle: Pmarket < PbackingPmarket < Pbacking → Buyback Demand Surges → Reserves Exhausted → Death Spiral.

[Black Swan Conduction Chain] Bank run → USDC de-anchoring → DAI collateral devaluation → liquidation auction failure → agreement insolvent (in the Silicon Valley bank event, DAI de-anchoring reached 9%, and the liquidation gap was 43 million US dollars)