OVERVIEW
Protocols like Compound, Aave, and MakerDAO have introduced a new dimension of financial possibilities with supply-demand based interest rates, flash loans, and crypto-collateralized stablecoins, respectively. Among these game changers is a project called Ampleforth which has recently taken the spotlight, and for good reason.
Ampleforth aims to provide the next generation of synthetic commodities, which may eventually generate independent new asset classes to diversify each portfolio. Although the supply is flexible and the price constantly finds a balance, AMPL carries currency value.
Ampleforth is a digital-asset-protocol for smart commodity-money.
The Ampleforth protocol receives exchange-rate information from trusted oracles, and propagates that to holders of its units (Amples) by proportionally increasing or decreasing the number of tokens held by each person. For traders, these changes in exchange rates and quantities will translate into changes in the market value of Ample. Therefore, short-term traders, especially those who use automated or algorithmic methods, will have to design new strategies to trade Ampleforth.
The idea of Ampleforth itself came from examining two things (among others) that cryptocurrency are seeking to redesign: money and banking. Ampleforth cryptocurrency is modeled on a theoretical currency called Ducat proposed by the famous economist and philosopher Fredrich Hayek. This currency will increase and shrink its total supply to maintain its purchasing power for commodities such as food, oil, housing and precious metals.
Various economic conditions such as economic recession, prosperity, and technological progress will affect the amount of money people want to hold. For fixed supply currencies such as gold, silver and bitcoin, these changes in demand are completely represented by changes in currency value. This means that fluctuations in demand will translate into the price of anything in that currency. Therefore, a sudden shock in demand will undermine the stability of the ecosystem supported by fixed supply assets. The greater the complexity of the ecosystem built on fixed supply assets, the greater the risk of chain failure.
In order to solve this shortcoming, AMPL wants to adjust its supply fairly and automatically according to demand, without the need for any bank. AMPL is designed as the simplest and most direct solution to the problem of inelastic supply, which limits assets such as gold and bitcoin.
AMPL's smart contract design allows the increase and decrease of supply to be automatically executed without any need for a transfer between peers, and without the need for a bank. The currency agreement will automatically adjust the supply of AMPL in all user wallets based on the price. This means that the amount of AMPL you have will vary based on market conditions. When the price is high, the wallet balance will automatically increase. When the price is low, the wallet balance will automatically decrease. This supply adjustment operation is carried out once a day, which is called rebase.
This daily rebase operation is applied universally and proportionally across every wallet’s balance. This means AMPL is non-dilutive. Like Bitcoin, if you own 1% of the overall network you will always own 1% unless you actively make a transfer.
DEEPENING
After the overview of the project, let's move on to an in-depth analysis!
Ampleforth aims to provide the next generation of synthetic commodities, which may eventually generate independent new asset classes to diversify each portfolio. Although the supply is flexible and the price constantly finds a balance, AMPL carries currency value.
At a high level, the policy contract reflects price changes in the market as supply changes in wallet balances. This in-turn incentivizes market actors to adjust price. Price informs supply algorithmically and supply informs price behaviorally, in a cycle.
Bitcoin's lack of connection to traditional assets brings diversity to a highly interdependent global economy by giving users the option to exit into an asset outside the traditional cycle of consumption and production. However, since Bitcoin, thousands of new cryptocurrencies have failed to add any diversity to the ecosystem because they are either connected to traditional assets or their price movements follow Bitcoin too closely. Economically, it is as if only one new asset has been introduced because adding more identically designed cryptocurrencies offers no marginal optionality.
Why AMPL is a new DeFi (Decentralized Finance) building block?
The high correlation that prevails in cryptocurrencies, creates systemic risks in the Decentralized Finance (DeFi) ecosystem, because in such environments, a basket of assets cannot be used to reduce total volatility. However, AMPL has created diversity in a basket of decentralized assets. This means it can be used to build more powerful tools in the DeFi ecosystem. This is a new original building block.
Today's decentralized assets, BTC and ETH, are the original components of the new DeFi economy. These assets can be arranged to construct instruments such as loans, debts, and synthetic stocks. But their limitation lies in their volatility and high correlation with each other.
Over-collateralization of DeFi applications is a common practice to address the inherent volatility of useless mortgage assets, but the risk of liquidation is still high. Unless a basket of decentralized assets can be built, many DeFi applications are either unreliable or will be forced to use licensed centralized assets as collateral.
AMPL can be a better Bitcoin in future?
The AMPL protocol automatically converts price fluctuations into supply fluctuations. However, it is these traders seeking incentives that have adopted incentives to propagate these supply changes back into prices. In other words, the price informs the supply in a periodic manner, and the supply informs the price in a behavioral manner.
This cycle takes the form of a step-function-like movement pattern that alternates between static periods, where price and supply are in equilibrium, and dynamic periods where the market searches for its next equilibrium.
Even when supply is volatile, AMPL can be used as a unit of account. Use in this regard would be major step forward for cryptocurrencies, because it means the currency would have a real-exchange-rate in addition to a nominal-exchange-rate. Since the real exchange rate is more resistant to change than the nominal exchange rate, the use of currency as a denomination currency helps economists call it nominal rigidity.
This stickiness further enables currencies such as the U.S. dollar to withstand macroeconomic shocks and has played an important role in the longevity of currencies throughout history. If AMPL is at the current maturity level of Bitcoin, we hope that it has already been meaningfully used in denominations. In the long-run AMPL becomes a simple bankless asset, like Bitcoin, except it can be used for denomination and adapts to economic shocks.
Ampleforth’s goal is to compete against national currencies, and perhaps against Bitcoin as well, to become the world currency.
