Zai Community Open Letter:

First I would like to thank the ZAI developers for what they’ve created. I truly believe that the ethos behind ZAI is what is needed in the rapidly expanding algorithmic stablecoin cryptoverse. While you may be anonymous, I respect your need for that privacy given the implications of the monster that you have created.

That being said, you fucked up. That’s not a condemnation, merely a statement of fact. Don’t worry, you’re in good company. It seems that the exact error you made was made by the Maker team (and likely countless others.) That’s not bad company to be in, so I forgive you. Please take this as my effort to engender discussion on how to best move the project forward.

In its current incarnation coupons are zero sum in that one ZAI burned at less than one DAI is equal to one ZAI redeemed at or equal to one DAI. This coupon redemption paradigm works so long as demand for the token continues to grow. As there is no mechanism to remove ZAI permanently from the total it becomes less efficient in periods of reduced demand (see DSD/ESD.)

There are a few concerns within the protocol that need to be addressed. Token supply, coupon incentives, and elasticity of supply being the most pressing. Given that we’re going to be three days into expansion in the midst of what should be a debt cycle we have an immediate concern in how to best address supply, coupon demand, and the lack of elasticity in supply going forward. It is my strong belief that this can be best addressed through a change in the coupon redemption logic of the protocol.

I am working with the assumption that we must reduce supply to ensure that the project succeeds. Towards that end I believe that the most elegant solution towards reduction in supply is the establishment of a reverse auction system for coupon redemption where coupon holders place secret bids that the redemption system then prioritizes from lowest to highest when redeeming.

The ability to deflate the token supply is important for both the short and long term health of the ZAI Protocol. In its current form, with a supply that only expands, it is my belief that ZAI holders will avoid purchasing coupons as there is little reason to expect the ZAI token to regain its peg at its currently inflated supply. Coupons currently serve as proxies for ZAI at a 1:1 exchange rate. Buying a coupon at any price requires the rational assumption that you can then redeem that coupon for ZAI at a later date (within 365 days.)

This proposal works because there are competing psychologies and motivations for people who buy coupons. There are all sorts of investors and speculators with varying thresholds for risk and profit motive. A “whale” speculating at scale is likely willing to settle for a lower return in order to secure priority in redemption while a smaller investor may not. This spectrum allows for a system where Ten ZAI coupons may be exchanged for Two ZAI in a transaction where all incentives align and market participants are satisfied. This serves as a deflationary mechanic and adds elasticity to the supply of ZAI similar to how the Federal Reserve Bank dictates monetary policy.

Rather than a first come first served system dominated by bots it would work as follows.

X buys 100 ZAI coupons with 100 ZAI when ZAI is priced at .10 DAI

Protocol reaches equilibrium where ZAI=DAI and redemptions begin.

Coupon holders will bid to have their redemptions processed first each epoch, where the lowest bids are selected by the protocol.

Using the same 100 ZAI coupons X originally purchased

X bids to redeem 100 ZAI coupons at .11 ZAI/coupon (because ZAI is now = DAI) which puts X at the front of the line and yields X eleven ZAI (worth 11 DAI.)

This transaction removed 89 ZAI from circulation and netted X, One DAI

This proposal is not within the realm of my technical ability, so this letter is as much for the ZAI devs as it is for anyone that may be interested in taking on a challenging project and collecting the bount(ies) attached to it. I will propose that funds be removed from the community fund to further this proposal in the form of bounties offered.