Gyroscope Thesis

Nearly four years after releasing our MakerDAO thesis, we believe another stablecoin, this one powered by Gyroscope, has the potential to complement Maker & DAI’s formidable achievements. With the US government proposing to ban “endogenously collateralized stablecoins,” crypto would do well to get more serious about resilient, decentralized stablecoin designs, if it doesn’t want to eventually rely on central bank digital currencies (CBDCs) or centralized stablecoins for stable value transfer. Everything in the Gyroscope protocol has been designed with long-term stability in mind, from the resilience and liquidity of its decentralized stablecoins, to the forms of governance that are implemented to sustain the system. 

If DAI has two weaknesses, they’re liquidity and the process for achieving collateral diversity. The Gyroscope protocol addresses both, which we don’t put forth as a way to displace Maker, but instead as a way to relieve some pressure from DAI in one of crypto’s most important pursuits — creating free, stable currencies for global commerce.

The Gyroscope protocol has a few key mechanisms to understand. First off, its stablecoins are collateralized by a number of interconnected, but independent, vaults. These vaults are largely Balancer pools, composed of a variety of assets, with other stablecoins being the assets of choice to start. As more vaults are added, suitable asset-pools will be selected through a holistic view of resilience, taking into account a range of risks including volatility, censorship, regulatory, counterparty, oracle, and governance risks. One can think of the collateral behind GYD – the USD-denominated stablecoin created by the Gyroscope protocol – as pictured below. While the system will start off supporting one USD-denominated stablecoin, little prevents it from supporting stablecoins of other denominations (eg, EUR, CNY, JPY, etc).

Behind the scenes there is a primary-market AMM (PAMM), complemented by secondary-market AMMs (SAMMs). GYD is minted and redeemed by the PAMM. To mint, supported collateral assets must be deposited into one of Gyroscope protocol’s varied vaults. GYD is minted against those deposits to support a target long-run collateralization ratio of 100%+ (where the “+” comes from system fees and yield on reserve assets). If redeeming, then you do so 1:1, so long as the system is fully collateralized. 

When the reserves fall below the 100% collateralization ratio, the PAMM will automatically redeem GYD at less than 100% of collateral value. While painful, “the goal of decreasing redemption quotes is to disincentivize bank-runs and attacks on the currency peg and reward users who wait for a transitory downturn to pass in a sustainable way. While the ability of stablecoin holders to exit is retained, the Gyroscope protocol, importantly, provides reasons to bet on the stablecoin returning to its target price over time.”

The Gyroscope protocol is intended to dampen runs on the reserves should there be a severe shock, and instead, align all participants to stay the course until the system has had a chance to recollateralize itself. Recollateralization happens through a number of methods, such as the underlying reserve assets recovering in price, yield generation via reserve assets, sale of treasury assets, or through protocol fees. In periods of high stress, the redemption rate automatically drops beneath the reserve ratio as pictured below, which means that redemptions are always sustainable, though they do induce a haircut.

The SAMMs, or secondary-market AMMs, are designed to provide redundancy and maximal liquidity for the Gyroscope protocol stablecoins. Since SAMMs are AMMs, they are mechanisms designed to provide liquidity at their core. SAMMs can be thought of as similar to Uniswap v3’s concentrated liquidity design, but built using the flexibility of Balancer, providing tight bands of deep liquidity at price ranges for the underlying assets that facilitate GYD staying near $1. SAMMS, therefore, provide a deep network of diverse liquidity around GYD, as pictured below. 

The Gyroscope protocol is not only pushing the envelope of liquid and robust decentralized stablecoin design, but also putting forth new governance approaches to keep the system’s actors aligned in support of the protocol’s health. One of these is optimistic governance, which allows for proposals to be put forward by governors, while retaining a timelock window for guardians to veto the proposals. As a result, a protocol can evolve quickly but still has means to protect itself against malicious proposals.

The Gyroscope protocol is also pioneering “conditional cashflows,” which allow governors to claim rewards for good governance only after the system has been healthy for a sufficiently long period. Cash flows can come from the protocol through minting/redeeming fees for the stablecoins, or through fees on revenues that accrue to the LPs of The Gyroscope protocol’s AMMs, though governance will have to choose to implement these fees. Meanwhile, day-to-day governance of the protocol is automated through Gyroscope’s dynamic PAMM curve, oracle safety parameters, and system of circuit breakers.

What’s the current state of the Gyroscope protocol? After 18 months of testnet, where many attempts were made to break the system, first pools have been launched on Polygon for testing purposes, with the full launch to follow on Ethereum. The design follows decades of academic work, alongside empirical study of the largest crypto-based stablecoins to date. The Gyroscope protocol is a great example of how DeFi is not dying, but continuing its evolution over time. If you want to get involved, jump into the Gyroscope protocol Discord where there are already 12,000+ members, with hundreds online at any given time.