Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), published with permission.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, published with permission.
Written by: Derek Schloss and Stephen McKeon, partners at Collaborative Fund, a tech venture capital firm
Compilation: Leo Young
Ampleforth has recently gained a lot of attention in the market, and new projects continue to integrate similar functions in their own protocols. It is worth taking some time to read Ampleforth, understand its design and pricing mechanism, gain insight into the psychology and demand drivers behind it, and discuss the direction of its future evolution.
Ampleforth (AMPL) adopts an "elastic supply" cryptocurrency economic policy, that is, the total amount of AMPL varies with the unit price. The principle is as follows:
At 10:00 am Beijing time every day, the Ampleforth smart contract will increase or decrease the total amount of AMPL, and the daily total amount adjustment is called "Rebase".
All wallet balances receive supply adjustments proportionally. After the rebase, the proportion of token holders' entire network holdings is the same as before the rebase. Rebase is not dilutive, as all account balances are adjusted proportionally, whether positive or negative.
There is no airdrop or transaction related to the balance change in the wallet, but the AMPL smart contract function is in effect.
Daily rebase is based on AMPL market price. If the AMPL transaction price is higher than the target price by more than 5%, the AMPL holdings in the wallet will increase after the rebase. If the AMPL transaction price is lower than the target price by less than 5%, the AMPL holdings in the wallet will decrease after the rebase.
The target price is US$1 in 2019. The 2019 target price is $1, and now in 2020, the target price is $1.011 when adjusted for inflation (CPI). Then the balance range is between $0.96 and $1.06 (+/- 5%). The market price (quote from the oracle machine) is in this range, and no rebase will be performed.
Understanding Rebase with Analogies: Stock Splits, Herds, Gold, and the Dollar
Analogy models help investors understand how wealth changes with rebase. The increase in supply of four other asset classes is explored below: stocks, bulls, gold, and the U.S. dollar.
Let's start with stock splits in the stock market.
To control the price per share, companies split their shares, lowering the price per share (or raising the price per share through a reverse split, or joint stock). For example, if a company does not want its stock price to exceed $100, but now it reaches $90, it can split 2:1. If I have 100 shares, it becomes 200 shares after the split. This proration is similar to AMPL. If I have 100 units of AMPL, 10% Rebase, then I now hold 110 units of AMPL. The balance in each wallet will also increase proportionally.
What will happen to the price after the split?
Answering this question is not easy. The stock is split 2:1, and the trading price of each share at the opening is halved (45 = 90 - 45), so the total value of my stock remains unchanged (100*90 US dollars = 200*45 US dollars). When I teach stock splits in class, I always use the cake metaphor. Cutting a cake into smaller pieces does not change the total weight of the cake any more than splitting a stock into more shares does not change the fundamentals of the company. Changing the total number of shares has no effect on the value of the company's shares.
But it is important to note that AMPL as a commodity currency is not a stock, nor is the underlying agreement a company. The value of a company's stock is the discounted value of future cash flows , a valuation framework that does not apply to commodity currencies, so the analogy of a stock split doesn't give the full picture of AMPL. For the assessment framework of commodity price-to-quantity adjustments, we need to take a slightly different approach.
In this analogy, cattle are a consumer good, not commodity money (at least not in modern times). Despite digital consumer goods, AMPL is not. Imagine an adjustment in the supply of consumer goods, rather than a simple increase in supply like a stock split. This introduces a concept that the increment causes the existing total value to increase, but this analogy is still not perfect.
Let's take gold, the oldest commodity currency in the world, as an example again. What happens when the gold supply increases? An increase in supply adds value to the party (such as miners) who increases the supply. If the miners increase the supply by 1%, the increase will not increase the gold in the personal vault. Even as supply increases, the amount of gold held by individuals remains unchanged. The overall market balance, according to the specific demand, increments enter the market, after the balance, the market price decreases. If individuals do not get the same share of supply increments, the value of wealth will also decrease accordingly. An increase in supply (output) causes the value of current holders (stock) to decrease, and investors can use stock-to-flow ratios to value commodity currencies.
Finally, let’s look at fiat currency. If the Fed prints dollars, will your funds increase? Maybe. For example, additional money may be remitted to you as aid. If you are the recipient, your cash holdings will increase. However, the additional money will not be divided equally among all holders in proportion. For example, foreign dollar holders cannot receive remittances. You can argue that the additional money issued by the government will cause an increase in interest and a corresponding increase in bank deposits, but this involves another concept: currency is held as an investable asset. There is no interest on the paper money you keep at home, and it is interesting to see if a central bank digital currency will change that. An increase in the money supply creates price inflation, meaning a decrease in purchasing power per unit. The topic of the additional issuance effect of legal currency is too grand, so I won’t discuss it too much here. But we can conclude here that the increase in fiat currency will not be distributed to all holders in proportion, so it is not appropriate to compare fiat currency with AMPL.
Thus, the Ampleforth supply pattern is similar to stock splits and herd increases, but completely different from gold and the dollar.
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price mechanism
Let's look at some relevant numbers for Rebase.
Daily Rebase is calculated as (Oracle Price – Target Price)/10. If the price of the oracle on that day is $2 and the target price is $1.01, then the balance of AMPL in each wallet will increase by 9.9% after Rebase on that day, that is, [(2.00–1.01)/10].
According to regulations, the negative adjustment upper limit is 10%, and the positive adjustment has no upper limit.
In effect, Rebase makes the price move in the direction of the "geometric mean market makers" as it does on Uniswap. The weighted geometric mean of the system control reserve constant. This means that X is a constant for the following formula:
A positive adjustment will increase the total amount of AMPL in the fund pool, so the price of AMPL must be reduced to keep X in measure, and negative adjustments are the opposite.
For example, before the rebase on Uniswap, 200 AMPL was exchanged for 1 ETH, and after the 10% rebase, there were 220 AMPL. Some people may want to enter the transaction one ten-thousandth of a second after the rebase, and use the system to make a profit of 1.1 ETH. No, because after the amount of AMPL in the pool is adjusted, the price immediately changes from 200 AMPL per ETH to 220 AMPL per ETH. In other words, AMPL is lower in price against ETH (and the same against USD). This does not require arbitrage trading. Rebase itself makes the price closer to the target price by adjusting the fund pool.
It is important to realize that Uniswap prices are different from AMPL oracle prices, and we set out the table below to explain why.
Assuming there is no buying or selling after the rebase, we will use the Uniswap price to guide the rebase. If someone buys 500 AMPL for $1,000 at a price of $2, then stop trading and wait for Rebase. Twenty-two days later, the AMPL price returns to $1.06, the total price remains unchanged, and AMPL becomes 942.
Next is the psychological aspect. Uniswap prices are not oracle prices. The Uniswap price is not the same as a commodity currency issuance, it is similar to a stock split.
If market participants believe that the increment is valuable and will not proportionally reduce the value of asset holdings before the Rebase, we will see assets traded at higher prices on centralized exchanges, and Uniswap immediately adjusts the price. This will lead to arbitrage behavior, pushing up the price of Uniswap, and lowering the price of the centralized exchange until the prices of the two are close.
Ampleforth's adjustment also has a reference point: $1 in 2019. Responses to reference points can be seen as behavioral biases, but do have an impact on economic outcomes. Programmable cryptocurrencies enable functionality not possible with traditional assets, so the psychological effects of daily rebases are unstudied and under-understood. This is the best experiment in the field of crypto assets today, because it will test the currency design space of the fusion of psychology and economics.
As the price and supply of AMPL continue to adjust, the investment perspective focuses on network value. Our view is that network value depends more on demand than supply. For Ampleforth, supply is tied to demand.
https://www.ampleforth.org/dashboard/
The question, then, is what is driving demand?
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Psychology of Ampleforth
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You should consider the following three points:
Motivation
short term speculation
AMPL economic utility rises
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Motivation
The initial rise in demand for AMPL illustrates the role of incentives. One of the questions that we've watched Ampleforth debate a lot in the past is, what attracts more people to start participating? If AMPL is to become the commodity currency of Ethereum or other ecology, then the Ampleforth system needs more participants.
Enter the era of "yield farming".
On June 23, 2020, the Ampleforth team launched the incentive project Geyser, which distributes rewards to users who provide liquidity for AMPL-ETH trading pairs on the non-custodial decentralized trading platform Uniswap. Liquidity begets liquidity, which is a demand catalyst.
Users who provide AMPL-ETH liquidity on Uniswap, in addition to receiving liquidity provider (LP) rewards, can also mortgage LP tokens on Geyser (background reading: Placehoder's "Liquidity Proof"). Users provide more liquidity in Uniswap and mortgage in Geyser, and can obtain more AMPL reward shares through the project.
It should be noted that the blockchain can not only track asset balances, but also track asset holding time, which can be described as a killer application. How does this work for the Ampleforth incentive program? In addition to rewards based on the amount of liquidity, Geyser can also reward users according to the Geyser mortgage period. Those who mortgage for more than 90 days can get up to three times the reward.
Geyser has three types of incentives: 1. LP rewards on Uniswap; 2. deposit volume rewards; 3. deposit period rewards. This brought a lot of attention to Ampleforth and also had some second order effects on the Ampleforth system.
One effect of Geyer is to substantially increase the dispersion of AMPL holders. In June 2018, Ampleforth was a private project, and the network was only controlled by the team, advisors, and a small group of investors. In June 2019, Ampleforth made headlines when it raised $5 million in just seven seconds of a Bitfinex IEO. In June 2020, about 4,000 Ethereum wallets held AMPL, and then Geyser appeared.
As of the completion of this article, the addresses holding AMPL wallets are close to 20,000. Another effect of Geyser on Ampleforth is that the liquidity of AMPL has increased significantly. The AMPL-ETH Uniswap fund pool is the largest fund pool on Uniswap in the past 30 days, with a total of 45 million US dollars, bringing good market depth to trading pairs. For a period of time, the AMPL-ETH fund pool accounted for more than half of the daily trading volume and one-third of Uniswap's total liquidity. In July, the trading volume of AMPL-ETH on Uniswap reached 500 million US dollars.
Ampleforth is optimizing the commodity currency use case, reliable currency requires reliable liquidity. This stimulates the establishment of a deep pool of funds that motivate demand for liquidity. Following Geyser's success, the Ampleforth Foundation recently announced that 23.5% of the network's tokens will be used to start supporting Geyer or similar projects over the next decade, focusing on decentralization, liquidity, network health, and broad rewards.
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short term speculation
A project should not be abandoned just because of speculation. There is the same speculative demand on BTC and ETH. Every time this comes up, the media says Bitcoin is dead, and we don't like to do the same for AMPL.
The cycle of ups and downs is one of the characteristics of the process of cryptocurrency maturation. Bitcoin experienced a surge in demand in 2011, 2013, and 2017. Each time, it was followed by a big drop, and then a new high. For example, in the fourth quarter of 2013, the value of the BTC network was US$1.5 billion, which then soared to US$13 billion in the quarter, halved in the first quarter of 2014, and halved again in 2015. In 2015, the market value has been between 3 billion and 4 billion US dollars, and it has never returned to 1.5 billion US dollars. At the beginning of 2017, the market value of BTC was 15 billion US dollars, soared to 300 billion US dollars in the fourth quarter, and then remained at 60-70 billion US dollars in late 2018 and early 2019. Another $15 billion drop. An important indicator for evaluating AMPL is that after demand increases and decreases fluctuate, the value of the AMPL network is higher.
Only time will tell how alive Ampleforth is. Long-term success or failure depends on the applicability of the protocol and the vitality of the community. Speculation is only a window for the market to understand applicability, but short-term fluctuations in network value can also be a distraction.
Gauntlet Network released a research report in August 2020 to analyze Ampleforth's transactions from January 3, 2020 to June 22, 2020. At the same time, it simulated different short-term trading strategies in the Ampleforth system and evaluated the effect. After simulating the hypothetical distribution of different market participants such as arbitrage traders, balance traders, mean reversion traders, and trend traders, it was found that the Rebase arbitrage trading strategy is the only trading model with considerable profitability. A simulated assessment of the data in the second half of 2020 will be interesting.
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AMPL economic utility rises
If the asset has no economic effect, the agreement itself is not sustainable for short-term incentives or short-term speculation. In order to achieve sustainability, the Ampleforth protocol (and AMPL) must become a convincing economic product, and the persuasiveness of the product lies in the stickiness of community users.
Since the birth of Bitcoin, the network is open, tamper-proof, and transparent, coupled with verifiable scarcity, reshaping the thinking of individuals and institutions around the world on currency and digital value.
Many other cryptoasset networks are also optimized for commodity currency use cases. Leveraging Bitcoin's economic design features (eg, fixed supply), while iterating on other features (eg, privacy, governance, consensus), we've seen many different experiments create new cryptocurrencies. Supply is just another dimension of design and not the subject of many experiments. This is mainly due to the increase in supply, which is not good for holders' assets if it is not distributed proportionally to holders.
The supply of assets is fixed, and the fluctuations in demand for asset holdings are fully reflected in prices. On the other hand, supply-elastic assets such as AMPL absorb positive or negative demand shocks through supply increases and decreases, keeping prices relatively stable. Importantly, the holder's "wealth" (unit quantity * price) will still change with fluctuations in demand, but volatility affects unit quantity rather than price. This validates the old adage that financial risk is seldom reduced, more shifted elsewhere.
Is the transfer of price volatility from volume to unit effective? The answer is maybe. But consider three functions of reliable money:
Unit of Account (UoA). "One piece of candy 1 AMPL"
Medium of Exchange (MoE). "Okay. I'm happy to accept AMPL to buy sugar"
Store of value (SoV). "I want to save AMPL in the cold wallet for ten years before buying sugar"
We have noticed that before 1971, the United States used gold to regulate the supply of the base currency dollar, but gold was not convenient for value exchange, and the denomination unit was the dollar based on gold rather than gold itself. Cryptocurrency wallets and exchange infrastructures continue to evolve and merge, asset exchange gradually becomes frictionless, exchange costs tend to zero, and ultimately exchange costs are negligible for users.
This unties the properties of reliable money. Compared with fixed total assets, flexible supply assets are more useful as a unit of account, and assets with a deep liquidity pool may become the best medium of exchange. If AMPL can reach a stable target state, it can represent the optimal unit of account, because the target price will rise with the inflation of the fiat currency.
Of these three functions of reliable money, store-of-value properties are the least predictable for early-stage experimental assets. Since volatility affects unit volume rather than price, the price of candy may still be 1 AMPL ten years from now, but you may have 0.01 AMPL or 500 AMPL with your wallet open. So it is worth considering that instead of putting your AMPL in a cold wallet, you can buy AMPL forward contracts to transfer the risk to investors who want to bear market value fluctuations.
In order to prove the characteristics of the store of value, AMPL needs to achieve stability, and the long-term price remains in the equilibrium price range, only real use demand changes (not speculation) occasionally cause deviations from the price range. For example, a popular app added AMPL as a payable currency, driving demand for AMPL. Theoretically, the price will exceed the price range according to the demand change, increase the supply to meet the market demand, and then return to a new balance.
A steady state cannot be achieved through a large number of speculative transactions, but through the integration of non-speculative uses of AMPL. In addition, there are psychological factors, AMPL will only reach a stable state after the market believes that it has reached a stable state. The characteristics of a stable state are that there is continuous buying support below the target price, continuous selling pressure above the target price, and the price is in a balanced range. Long-term AMPL holders believe that a steady state will eventually be achieved and that high network value will be achieved.
AMPL, while still in its early days, has been working as intended:
Elastic supply. The supply of AMPL has continued to expand and contract over the past year.
low volatility. Except for very low demand in September-October 2019 and very high demand in July 2020, the AMPL price has always fluctuated between $0.5 and $1.5. Although it is still a bit out of the equilibrium range, the price of assets with a relatively fixed supply is relatively stable.
Correlation out of . Gauntlet's August 2020 report concluded that AMPL's historical returns were uncorrelated with BTC and ETH over time by market capitalization. We will closely observe the correlation with other assets, and the growth of Ampleforth network value. It is important that AMPL (monetary unit) reaches a stable state as the base currency and must accompany Ampleforth (system) to reach a credible midpoint. In the next few years, its decentralization will be reflected in several characteristics of the market, such as protocol changes, oracle quotations and continuous development of the project.
