First Digital USD (FDUSD) is an algorithmic stablecoin designed to maintain a 1:1 peg with the U.S. dollar. Launched in 2021, FDUSD aims to maintain its peg through algorithmic mechanisms as opposed to being backed by fiat reserves. It is one of several algorithmic stablecoins seeking to balance stability with the decentralization of not depending on custodied collateral.
How FDUSD Works
FDUSD utilizes a dual-token model consisting of:
- FDUSD stablecoin always valued at $1 USD.
- FDShares coins representing shares in the system.
When FDUSD demand exceeds supply, the protocol algorithmically expands supply and sells the new FDUSD for FDShares at market rate. Conversely, if supply becomes too high, FDUSD can be burned in exchange for FDShares from a community pool at market rate.
This strategy aims to balance FDUSD price via FDShares dilution/contraction. Stability fees on borrowing also help retain peg.
FDUSD VS Fiat-Collateralized Stablecoins
FDUSD contrasts with fiat-backed stablecoins like USDC which must hold central bank reserves.
Potential advantages include:
- Requires no fiat custodianship that introduces risk.
- Faster, algorithmic minting/burning based on market signals.
- Arbitrage incentives help maintain peg organically.
However, reliance on algorithms over collateral comes with risks:
- Harder to maintain 1:1 peg consistently long-term.
- Dilution of FDShares could disincentivize holders.
- Slow growth in FDShares value undermines stability mechanisms.
Striking the right equilibrium between shares and stablecoin remains challenging.
If adoption grows, FDUSD aims to be usable wherever stablecoins are needed:
- Medium of exchange for decentralized finance protocols.
- Stable store of value for crypto investors.
- Payments requiring minimal volatility.
- Denominating smart contracts requiring price stability.
However, FDUSD must build much greater trust in its peg stability before seeing mainstream use. Most DeFi apps utilize USD Coin, DAI, or fiat-backed alternatives presently.
Algorithmic stablecoins like FDUSD present an inventive model aiming for scalability and decentralization — but struggle with consistently maintaining pegs. As algorithms, incentives, and arbitrage techniques advance, algorithmic models offer promise for systemic stablecoins detached from fiat collateral. But high profile failures like Iron Titan show risks remain very real for current designs. FDUSD provides an experiment in crypto’s evolution toward potentially solving the stability challenge.