Introduction
Gyro is DeFi's all-weather stable currency. It is asset-backed and autonomous and designed to be an enduring foundation for liquidity across DeFi.
These docs describe the Gyroscope design mechanisms as formulated through academic research and development. Gyroscope is designed to be fully decentralized, with the Gyro DAO responsible for deciding which mechanisms are incorporated into the final design and launching the Gyroscope system.

The Gyroscope protocol

Gyroscope's mission is to build robust, public infrastructure for DeFi. The central piece is a fully-backed stablecoin with all-weather reserves and algorithmic price bounding:
  • A fully backed stablecoin: the Gyroscope stablecoin aims at a long-term collateralisation of 100%, where every unit of stablecoin is backed by 1 USD worth of collateral.
  • An all-weather reserve: the reserve is a basket of user-provided assets that jointly collateralize the issued stablecoin. Initially most assets will be other stablecoins. The reserve aims to diversify all risks in DeFi to the greatest extent possible. It considers more than just price risk, but also censorship, regulatory, counterparty, oracle and governance risks.
  • Algorithmic price bounding: Prices for minting and redeeming stablecoins are set algorithmically to balance the goal of maintaining a tight peg with the goal of long-term viability of the project in the face of short-term crises.
The Gyroscope Protocol will be launched on Ethereum. The protocol is still being developed. A gamified Kovan Testnet version is available that introduces the users to the core concepts in various, easily-accessible 'levels'.

First line of defense: all-weather reserve

The Gyroscope mechanism aims by default to being 100% reserved. The first line of defense is the all-weather reserve composition, which diversifies all risks in DeFi to the extent possible, considering more than just price risk but also censorship, regulatory, counterparty, oracle, governance risks etc. In early stages, the reserve will be mostly composed of other stablecoins, deployed in various fashions, but may vary long-term. A large shock to the reserve would only occur if there are even larger problems in other DeFi systems and Gyroscope aims to provide the least worst outcome.
The Gyroscope reserve is designed to segregate different risks into different vaults (triangles).

Second line of defense: algorithmic price bounding

Gyroscope involves new AMMs for a primary market (PAMM), through which Gyro Dollars are minted and redeemed, and secondary markets (SAMMs), which are designed to concentrate liquidity around the peg between mint and redemption quotes from the PAMM. Should the reserve experience a large shock (the first line of defense is breached), then the PAMM adapts to maintain liquidity around the peg to a safe extent and otherwise protects the reserve from being depleted through a circuit breaker that reverts liquidity to sustainable price levels.
This is part of the algorithmic component of the Gyroscope design: The bonding curves to mint/ redeem stablecoins measure the level of inflows and outflows, i.e., the time-discounted amount of stablecoins minted and redeemed.
These PAMM dynamics are designed to foster coordination in a game. The intuition behind this game draws on two sources of value: the value of the reserve as well as the intangible value from economic usage of the system. If there is enough of the latter source of value, which may be the case mid-to-long-term), then users will tend to coordinate to maintain the peg even if there are shocks to the reserve value. The PAMM design provides the opportunity for users to coordinate to maintain the peg, but with a circuit breaker in the PAMM shape in case they don't. The circuit breaker ensures that the reserve cannot be depleted and guarantees that the system has the chance to recover through yield and as the underlying space recovers.
The intuition of the currency peg coordination game is as follows:
Users form beliefs about the fundamental value of the stablecoin. These are based on the value of the reserve and how widely accepted and used the stablecoin is. But users also form beliefs about the beliefs of other market-participants (and so on). Gyroscope coordinates these beliefs. Since the value of the reserve is observable on-chain, as well as the rules governing how it will be used, rational users then implicitly agree on whether to attack or defend the peg since they only win by being in the majority. This aims to preempt confidence crises.

Tertiary lines of defense

Gyroscope also includes further lines of defense. The reserve can be recapitalized through auctioning governance tokens. In fact, Gyroscope governance is incentivized to do this at opportune times to build asset buffers against shocks as opposed to solely as a last resort backstop during a crisis. The Gyroscope mechanism can also work side-by-side with a leveraged loans mechanism (like Maker) to strengthen stability.

Enduring foundation for liquidity: a highly liquid DEX robust to asset failures

Gyroscope involves multiple SAMMs, which each concentrate liquidity within the PAMM band between Gyro Dollars and another paired asset. These provide guarantees on highly liquid paths in and out of Gyro Dollars. The SAMMs are also independent from each other: if the paired asset in a SAMM fails, then the remaining SAMM pools can still function, unlike one common AMM pool today. The SAMMs will form the center of a network of connecting pools that will allow efficient routing of trades. Some Gyroscope reserve vaults will deploy assets into pools that augment this network, and other existing AMM pools will connect with paired assets in the SAMMs.
Gyroscope SAMM and reserve pools form a DEX network, in which liquidity is robust to pool failures.
Last modified 4d ago