Ampleforth - Monetary innovation or Ponzi Scheme?
While there have been numerous innovations in the Cryptocurrency space since Bitcoin kicked this new sector and asset class off in 2009, I can personally count on the fingers of one hand the number of times a Crypto has captured my imagination because of it's novel economics, or tokenomics. It may come as a surprise to some that experimentation on a whole different level with money supply is not a common theme in the space. To me the previous notable innovations in this space are
Bitcoin, of course with it's deflationary money issuance model in the wake of the 2008 financial crisis. All hail the king of Cryptocurrencies!
Tether, with it's Stablecoin innovation. A way to move tokens backed by dollars around (and hence dollar value) in the Crypto ecosystem. Amazing!
Maker / DAI, with it's out-of-the-box approach to achieving 1:1 parity for it's stable coin DAI (and SAI) with the US dollar, using other crypto assets as collateral: Essentially a way to move dollar denominated value around the cryptosphere with no tether (pun intended) to the real / physical financial world. Exciting stuff!
In a similar vein comes a new Cryptocurrency, Ampleforth (AMPL). As Astronomer Carl Sagan said 'Extraordinary claims require extraordinary evidence', and we attempt to furnish such evidence in the remainder of this post.
In a nutshell
The AMPL smart contract has a target price of $0.96-$1.06 per AMPL and will expand the supply of AMPL tokens anytime the price is above $1.06 and decrease the supply of AMPL when the price is below $0.96. This occurs at a fixed time every day, by a process called rebasing.
Every wallet holding AMPL thus receives a proportionate increase (or decrease) in their AMPL token supply, every 24 hours. The manipulation of the total supply is to put upward or downward pressure on the price vis-a-vis total demand, so that it moves towards that $0.96-$1.06 target.
The technology
ERC20: Ampleforth is an ERC20 token without any fixed / capped supply. The AMPL smart contract has been designed to increase and decrease the supply of the token automatically without central intermediaries.
Predictable policy: The protocol is rules-based, predictable and non-discretionary as opposed to traditional / human discretionary monetary policies fraught with uncertainty.
Non-dilutive: Increased and decreases in token supply are distributed equally to all token holders i.e. if you own 1% of the network you will always own 1% of the network. There are no hidden transaction fees or seigniorage.
Bankless: In their own words, AMPL is a base money. It is not issued out of debt like the US dollar for instance and it does not depend on lenders of last resort.
Simple: The AMPL system is transparent and easy-to-understand. It has rules on when supply is expanded vs contracted. The rest of the system relies on individuals motivated by their own self-interest or profit to achieve an emergent market equilibrium.
Non-custodial: Much like other Crypto assets, ownership is recorded and managed on the blockchain. There are no outside parties or collateral involved.
Minimal governance: The system is designed to be simple and non-discretionary, thereby reducing the need for a heavy governance structure / protocol.
Uncorrelated: The way the system has been designed with it's supply and incentive structures lends itself to an asset that is completely uncorrelated to anything we see in traditional markets and even other crypto currencies. This is a highly desirable feature to have in a diversified portfolio.
The economics
The driving force behind the design of AMPL is the need for an asset with an elastic but predictable money supply. Gold and Bitcoin have rigid and predictable money supplies that do not lend themselves to responding to various economic system shocks such as recessions, booms and technology / productivity gains.
Fiat money on the other hand is elastic, but unpredictable and confers massive benefits on the first recipients of an expanding money supply (see the cantillon effect). They are also susceptible to regulatory capture, which allows the beneficiaries (Big banks for instance) to demand and receive tax-payer funded bailouts on the basis of a few well placed investment bets on Lobbyists. Talk about ROI and the very reason the crypto asset class exists today!
AMPL attempts to address the unpredictable nature of an elastic money supply with the simple non-discretionary rules described above and it is this elastic money supply that in the minds of its creators will help it better respond to economic shocks. This is an economic experiment well worth testing if there ever were one.
AMPL as DeFi Building block
Today's cryptocurrencies exhibit a high level of correlation to each other. This creates systemic risk in the current DeFi ecosystem which is collateralized with baskets of highly correlated assets. AMPL introduces diversity into this correlation mix and it may very well be this calling card that cements its bid to become a DeFi primitive building block: It's introduction into the asset / collateral mix reduces liquidation risk.
Geyser
One of the first forays of AMPL into the DeFi space is to incentivize holders to provide Uniswap liquidity. At a high level, one would provide AMPL-ETH liquidity to the Uniswap smart contract for that pair and receive 'UNI-V2 LP' tokens. These tokens can then be staked in the Geyser to receive the AMPL resulting from supply increases. This allows market-making to occur without forgoing the benefits of just holding AMPL in your ETH address.
Thought experiments
Market cap, not price: The trader in me finds this new token fascinating. It takes some getting used to. You buy tokens which secures non-dilutive ownership of a fixed percentage of the AMPL network. The key metric is Market Cap e.g. if you bought AMPL when the Market cap was $1 and then it increased to $2, you've just doubled your money. The price of AMPL is irrelevant. This is the first hump one needs to get over in understanding the dynamics here.
Technical analysis: The next logical question I had was whether could one apply metrics like RSI And MACD to the Market Cap or are these meant to be applied to Price only. An examination of the definition of RSI and MACD tells me that they are indeed as applicable to Market cap as they are to Price. This means the same technical analysis one would do with Moving averages, MACD and RSI for instance on crypto prices carry over to this new paradigm. Whew!
Negative rebases: What will be the market reaction when the price stays below $0.96 for a prolonged period of time and holders find that not only are they under water, but tokens are being removed from their wallets on a daily basis, with negative rebases!
Market action from higher prices: What type of FOMO will we see when people pile into AMPL at higher prices (one can imagine a dynamic where the higher the prices, the higher the FOMO) in order to not only benefit from a rising price, but also 15%+ increase in their tokens nightly. This would be a powerful driver of market action.
Ponzi Scheme? Short answer: No, because it does not benefit an earlier class of investors at the expense of late stage entrants and it confers no other benefits to them. The fact is that the coin is backed by some of the most reputable players in the space including Pantera Capital, Brian Armstrong (CEO of Coinbase) and Huobi Capital and has a world-class advisory board comprised of names like Joey Krug (Founder of Augur) and Niall Ferguson (World renowned economist, Hoover institute, Stanford university) among others.
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