The Future of Cryptocurrency: Adoption of the First Decentralized FlatCoin
A Closer Look at the Ampleforth Protocol and the Value it Will Bring to the Cryptocurrency Market as a Whole…
Store of Value vs. Unit of Account — Know the Difference
Simply put, a good store of value is an asset that is expected to maintain a high degree of value over large periods of time. The best SoVs share a common trait: Scarcity. Scarce assets are limited in supply which means that they are resistant to devaluation from dilution. Historically, gold has fulfilled the role of SoV because of its properties and scarcity. Since the discovery of gold around 2450 B.C., it has maintained a high degree of value relative to other commodities and assets.
In recent years, Blockchain technology has given rise to a new kind of SoV. With blockchain technology, perfect scarcity became possible for the first time in human history. The first cryptocurrency, Bitcoin, achieved perfect scarcity by having its supply capped at 21 million. This revolutionary development has provided people with a new vehicle to protect against the constant devaluation of the dollar due to inflation.
On the other hand, a good unit of account is one that can predictably measure the market value of goods, services, and other transactions. UoAs share a common trait: price stability. The fiat currency known as USD currently fills this role. Fiat currencies achieved higher price stability relative to SoVs like gold by having supply elasticity. Supply elasticity is achieved through monetary policies utilized by central banks called quantitative easing and quantitative tightening. These policies are used to convert price volatility into supply volatility which has the effect of making the dollar extremely stable relative to the value of goods, services, and other transactions.
Quantitative easing offsets deflation during fearful market conditions by giving more buying power to participants. Quantitative tightening offsets inflation by increasing borrowing rates which reduces buying power. The problem with this concept as it pertains to fiat is that quantitative easing is often abused by the federal government. To make this model more sustainable, the government would need to have a balanced budget. As most know, this is impossible due to poor foresight and the nature of government corruption leading to severe overspending and waste.
Why Scarce Currencies Like Bitcoin are not a Good Unit of Account
Scarce currencies struggle to adjust to shifts in demand. Any shifts in demand are entirely manifest in the price of the underlying asset which creates hyper-volatility. In a “boom & bust” driven market cycle, each “bust” results in an enormous amount of value lost. When a market busts, the value loss has a high potential to create liquidation crisis which leads to extreme market failure, contagion, and long term destabilization. Liquidation crisis causes long and painful economic depressions. Consider the aggressive boom & bust market cycles experienced by Bitcoin…
Because the supply of Bitcoin is perfectly scarce, higher demand for BTC is directly correlated with fewer available Bitcoins relative to the total supply. This means that Bitcoin liquidity plummets when demand spikes, contributing to extreme volatility which destabilizes any market built on top of it. Consider the charts below which track BTC exchange reserves against the price of BTC…
“This sort of volatility is due to this (dwindling exchange reserves). In DeFi we’ve seen this multiple times. The LP becoming devoid of tokens, the prices skyrocketing and the volatility gets insane. After, it implodes every time… really as fundamental as it gets”…-Dr. Mantis, DEFI Labs
As this relationship clearly demonstrates, higher demand for BTC is directly correlated with dwindling exchange reserves which contributes to hyper volatility.
Why Elastic Supply is Necessary for a Unit of Account
The focus of this segment will be on the pioneer of elastic supply currency, Ampleforth (AMPL). AMPL inflates and deflates depending on the price relationship to the 2019 CPI-adjusted US dollar. If the price of AMPL is higher than the 2019 CPI-adjusted US dollar, AMPL will inflate, if it is lower, AMPL will deflate. The total supply of AMPL automatically adjusts up or down at varying rates depending on market conditions.
Unlike fiat, the supply of AMPL adjusts in a non-dilutive fashion. when the government creates fiat money, it does it in a dilutive fashion, meaning that when money is created, it is not distributed to everyone equally. In short, the banking system creates money by making loans which means new money is distributed disproportionately. Banks are the first to get their hands on the new money while everyone else is diluted. This means that citizens of that government only suffer from the negative consequences of that inflation (the devaluation of their dollars) without reaping much of the benefit. AMPL fixes this issue by distributing inflation equally across all wallets relative to the holdings in those wallets. Every 24 hours, AMPL undergoes a rebasement, which is when the currency either inflates or deflates.
To understand how AMPL works, consider the elastic nature of fiat currency. Fiat currency can be labeled as an elastic inflationary standard. While money can be created at varying rates to encourage circulation in times of economic hardship, it is very difficult for the Federal Reserve to remove that extra money from circulation. This model inevitably results in surging prices of goods and services and failure of the currency as a whole when the money created during times of economic hardship catch up to the market.
In essence, AMPL utilizes the benefits of fiat currency elasticity without falling victim to all the pitfalls of fiat currency. AMPL has the ability to inflate when the market needs it to inflate and deflate when it needs to deflate in a fair, non-dilutive fashion. These mechanisms create a balance between the inflation and deflation of the currency which lessens the impact of negative shocks to the market while being sustainable in the long term.
Imagine the elasticity of AMPL being like the suspension of a car. When there are potholes or other kinks in the road, AMPL is able to absorb those shocks and continue its trajectory of consistent growth. Conversely, Bitcoin has no suspension and is subject to wild price movements which translate to exacerbated boom and bust cycles that hinder the developments of the cryptocurrency market.
How AMPL Eases Boom and Bust Cycles
Many inelastic currencies that achieved valuations in the 100s of millions, and even billions in the previous boom cycle completely imploded, never to be seen again. Many other currencies that became overvalued faced near death, only to be saved by the start of the next boom. In essence, the elasticity of AMPL gives it consistent long-term staying power in the event of market downturns. While the market cap of AMPL may shrink significantly, this shrinkage will not cause the functions of the protocol to break down. The functions of the protocol will simply adjust the supply of AMPL to accommodate the shrinkage.
In the event of a powerful negative shock to the cryptocurrency market, AMPL will enter a period of deflation to force itself back to equilibrium. Once AMPL reaches equilibrium in the short to intermediate-term following a correction, its market cycle effectively resets, and it will be able to continue in a healthy manor.
Diffusing the Volatility of AMPL by Using it as Collateral to Back a “FlatCoin” Derivative Known as SPOT
Even though AMPL is able to convert much of its price volatility into supply volatility, it is still subject to price volatility swings. These swings in volatility are natural and do not result in the breakdown of the fundamentals backing the protocol.
What is SPOT?
SPOT uses zero liquidation tranching to provide stability. The collateral, which is AMPL, is deposited into Sr. and Jr. tranches which resegments the volatility of AMPL into 2 assets with different volatility profiles. Those 2 assets are SPOT and stAMPL. SPOT is a low volatility derivative of AMPL and stAMPL is a high volatility derivative of AMPL. In short, using tranching, the volatility of collateral AMPL can be split into a low volatility decentralized asset called spot, and a high volatility asset called stAMPL…
SPOT can effectively be used as an inflation resistant stablecoin replacement because it is a low volatility derivative of AMPL. Because of AMPL, the supply of SPOT is able to scale up and down with demand without breaking.
This is fundamentally different from traditional stablecoins which rely on continuous demand for leverage on collateral to scale. Relying on continuous demand for leverage on collateral to scale is a primitive and dangerous way of doing things, especially when you are leveraging against highly volatile assets like ETH.
The Benefits of Spot Compared to Alternatives
- SPOT does not rely on centralized collateral for stability. AMPL is a decentralized free-floating asset that is capable of adjusting it’s supply through daily rebases to accommodate shifts in demand.
- SPOT is able to maintain stability without being pegged 1:1 to USD. Unlike every other stablecoin on the market, SPOT is not vulnerable to dilution from the Federal Reserve inflating USD. In other words, SPOT is the only stable unit of account that is not controlled or manipulated by the Federal Reserve.
- SPOT and stAMPL are proportionally redeemable claims on baskets of collateral. Just as UNI-V2 pools can unwind to an empty set without triggering bank-runs or cascading-liquidations, so can SPOT and stAMPL.
- SPOT adoption translates into demand for AMPL allowing the system to scale. This is unlike liquidation market based systems which rely on continuous demand for leverage on collateral to scale (ie: demand for DAI does not translate into demand for ETH).
- SPOT’s collateral is tranched in a manner that progressively degrades into its base-asset (AMPL) under stress rather than triggering bank-runs or cascading liquidations. In times of turmoil the system bends safely rather than breaking, by becoming temporarily more volatile.
Conclusion
AMPL & SPOT are superior building blocks to Bitcoin and fiat when utilized as a unit of account. The entire market would benefit from abandoning traditional 1:1 USD pegged stablecoins for AMPL & SPOT.
Learn More About Ampleforth:
SPOT Documentation: https://docs.spot.cash/spot-documentation/
AmpleforthOrg Twitter: https://twitter.com/AmpleforthOrg
My Twitter: https://twitter.com/BeepBoopSupreme
