Ups and downs, is it a demon or a fairy? Read Ampleforth’s currency experiment


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The famous cryptocurrency researcher Hasu said that there are only two types of people playing the Ampleforth project, “the one with an IQ value of 140 and the one with an IQ value of 60.” However, “only one of these two types of people will accompany you for a long time.”

There are constantly new projects integrating Ampleforth-like flexible supply functions into their own agreements. It’s time to challenge your IQ and get a better understanding of this ups and downs, demon and immortal project.

Written by: Derek Schloss and Stephen McKeon, both partners of the Collaborative Fund of technology venture capital. Compiled by: Leo Young

Ampleforth has recently gained great attention from the market, and there are constantly new projects integrating similar functions in its own agreement. Take the time to read worth Ampleforth, understand its design and pricing mechanisms, and insight into the psychological drivers behind demand, and explore the direction of its future evolution.

Ampleforth (AMPL) adopts the cryptocurrency economic policy of ” flexible supply “, that is, the total amount of AMPL varies with unit price. The principle is as follows:

  • At 10:00 am every day, Beijing time, the Ampleforth smart contract will increase or decrease the AMPL total , and the daily total adjustment is called ” Rebase “.
  • All wallet balance in proportion to accept supply adjustment. After Rebase, the proportion of the entire network holdings of coin holders is the same as before Rebase. Rebase is not a dilution, because 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 working.
  • Daily Rebase is based on AMPL market price. If AMPL transaction price is higher than the target price more than 5%, after Rebase AMPL increase holdings in the wallet. If the AMPL transaction price is less than 5% of the target price, the AMPL holdings in the wallet will decrease after Rebase.
  • The target price is $1 in 2019. The target price in 2019 is US$1, and now in 2020, the target price is US$1.011 after including inflation (according to the consumer price index CPI). Then the balance range is between US$0.96 and US$1.06 (+/- 5%). The market price (oracle quotation) is in this range, no rebase is performed.

Use analogies to understand Rebase: stock splits, herd, gold and the dollar

The analogy model helps investors understand how wealth changes with Rebase. Below will explore the other four types of assets increased supply of: stock, cattle, gold and the dollar.

Let’s start with the stock market began to talk about the stock split.

In order to control the price of each share, the company will split the stocks and reduce the unit price (or increase the price of the unit stock through reverse splitting, that is, joint shares). For example, if a company does not want its stock price to exceed $100, and now it reaches $90, it can be split 2:1. If I have 100 shares, it will become 200 shares after the split. This proportional distribution is similar to AMPL. If I have 100 units of AMPL and 10% Rebase, then I now hold 110 units of AMPL. Balance within each purse will be proportionately increased.

What will happen to the price after the split?

Answering this question is not easy. Stock 2: 1 split, opening trading price per share reduced by half (45 = 90–45), and that the total value of my stock unchanged ($ 10 * 90 * 45 = $ 20). When I talk about stock splits in class, I always use cakes as a metaphor. Cutting the cake into small pieces does not change the total weight of the cake, just like splitting the stock into more shares, it does not change the fundamentals of the company. Changing the total number of shares has no effect on the company’s stock value .

But it is important that AMPL as a commodity currency is not the stock, the basis of the agreement is not a company. Enterprises stock value is the discounted value of future cash flows, this framework does not apply to the valuation of commodity currencies, so the analogy through stock splits and can not find it all AMPL. Commodity price adjustment for the number of evaluation framework, we need to adopt a slightly different approach.

For example, if we have 100 cows and have 25 calves, we will not immediately say that the price of cows has been reduced by 20%. Increase the number of cattle will create new value, and if no new value, then the farmers will give up feeding. If the farmer’s cattle herd increases by 20% and there is an oversupply of cattle on the market, the market price of each cattle will also decrease. However, price changes depend on the market’s expectations of supply increments and the extent to which increments enter the market. If the merchant anticipates that there will be an influx of cattle into the market, the price will be adjusted in advance. And we expect the market does not respond (after all, the Mavericks were not grown up) to increase supply.

In this analogy, the cow is a consumer product, not a commodity money (at least not in modern times). Although there are digital consumer goods, AMPL is not. Imagine that the adjustment of the supply of consumer goods is not simply an increase in the supply like a stock split. This introduces a concept that increments increase the current total value, but this analogy is still not perfect.

We again with the world’s oldest commodities monetary gold, for example. What happens if the supply of gold increases? Increased supply will increase a party supply (such as miners) value. If the miner increases the supply by 1%, then the increase will not increase the gold in the personal gold cabinet. Even if the supply increases, the amount of gold held by individuals remains unchanged. The overall balance of the market, according to specific needs, incremental enter the market, the market lower after the balance, if individuals do not receive the same share of the incremental supply, it is also a corresponding reduction in the value of wealth. Increased supply (output) causes the current value of the holder (stock) decline in the stock of available investors output ratio (stock-to-flow ratios) for the valuation of commodity currencies.

Finally, look legal tender. The Fed prints US dollars. Will your funds increase? Maybe it will. For example, additional money may be remitted to you as assistance. If you are the payee, your cash holdings will increase. However, the additional money will not be distributed equally among all the holders. For example, foreign US dollar holders cannot get remittances. You can excuse the government additional money will result in the increase in interest, a corresponding increase in bank deposits, but which involves another concept: as a currency investment assets held. The banknotes you keep at home have no interest. Interestingly, I don’t know whether the central bank digital currency will change this phenomenon. An increase in the money supply will bring about price inflation, which means a decline in purchasing power per unit. The subject of additional issuance effects of legal currency is too ambitious, so I won’t elaborate on it here. But we can make this conclusion, incremental legal tender and will not be fully prorated to all sections of the people who live, it will be legal tender and AMPL less suitable.

Therefore, Ampleforth supply mode with the stock split and the increase in cattle is similar, but with gold and the dollar is completely different.

Price mechanism

Let’s take a look at some relevant figures of Rebase.

  • Daily Rebase is calculated by (oracle price-target price)/10. If the day oracle price of $ 2, the target price of $ 1.01, the day after that Rebase increase of 9.9% in each purse AMPL balance, that is, [(2.00-1.01) / 10].
  • As a rule, the upper limit of 10% negative adjustments, positive justification is no upper limit.

In fact, Rebase allows prices to move in the direction of ” geometric mean market makers ” as they do on Uniswap . The weighted geometric mean of the system control reserve constant. This means that X in the following formula is constant:

Ups and downs, is it a demon or a fairy? Read Ampleforth's currency experiment

A positive adjustment will increase the total amount of AMPL in the fund pool, and the AMPL price must be lowered for X to remain measured. A negative adjustment is the opposite.

For example, 200 AMPL for 1 ETH before Rebase on Uniswap , and 220 AMPL after 10% Rebase . Someone might want to enter the transaction one ten-thousandth of a second after 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 will immediately change from 200 AMPL per ETH to 220 AMPL per ETH. In other words, the price of AMPL against ETH decreases (the same goes against the US dollar). This eliminates the need carry trade, Rebase itself by adjusting the funding pool so that the price close to the target price.

Recognizing different Uniswap AMPL oracle price and the price is very important, we listed in the following table to explain important reason.

Assuming there is no buying or selling after Rebase, we use Uniswap price to guide Rebase. If someone buys 500 AMPL for $1,000 for $2, then stops the transaction and waits for Rebase. Twenty-two days later, the AMPL price returned to $1.06, the total price remained unchanged, and AMPL became 942.

Ups and downs, is it a demon or a fairy? Read Ampleforth's currency experiment

Next is psychology. Uniswap prices are not oracle prices. The price of Uniswap is different from the issuance of commodity currencies and is similar to stock splits.

If market participants believe that the incremental valuable, does not reduce the value of assets held in front of Rebase in proportion, we will see higher asset prices trading center of exchange, and Uniswap immediately adjust prices. This will be arbitrage, pushing Uniswap price, centralized exchange price lower until prices close to both.

Go back to the stock split, to be noted that the principle is not just the cost price friction also involves psychological factors. Investors find it expensive if the stock price exceeds $100. Massive academic research shows that investors will act on reference points. For stock investors in the twentieth century, $100 per share is the reference point. Part of the reason for the stock split is that adjustments based on reference points are in line with investor psychology .

Ampleforth adjustments also have a reference point: 2019 is $ 1. Responses to reference points can be considered behavioral biases, but they do have an impact on economic results. Programmable cryptocurrency brings functions that traditional assets cannot achieve, so the psychological effects of daily rebase have not been studied and understood. This is now encrypted in asset most wonderful experiment, because it will validate the integration of psychology and economics currency design space.

Reasonable people will debate whether it is reasonable for the value of the currency network to increase as the total amount of currency commodities increases? But in the end still have to go through the monetary value of community building. Currency is valuable because everyone believes it is valuable, and vice versa. Network value is the result of aggregation of market beliefs.

As the price and availability of AMPL continue to adjust investment perspective focuses on the value of the network. Our view is that network value depends more on demand than supply. For Ampleforth, supply depends on demand.

So the question is what is driving the demand?

The Psychology of Ampleforth

Ups and downs, is it a demon or a fairy? Read Ampleforth's currency experiment

July, Ampleforth network value to rise, then call back 65% from its peak. What is driving demand growth? More importantly, what is the long-term driver of demand?

You should consider the following three points:

  1. Motivating effect
  2. Short-term speculation
  3. AMPL’s economic utility rises

Motivating effect

Initially AMPL rising demand shows the role of incentives. One of the questions we have observed in Ampleforth’s frequent debates in the past is, what attracts more people to start participating in it? For AMPL to become the commodity currency of Ethereum or other ecosystems, the Ampleforth system needs more participants.

Enter the era of ” income farming “.

On June 23, 2020, the Ampleforth team launched the incentive project Geyser to distribute rewards to users who provide AMPL-ETH transaction liquidity on the non-custodial decentralized trading platform Uniswap . Liquidity brings liquidity, which is a demand catalyst.

Providing liquidity user AMPL-ETH in Uniswap, in addition to the availability of liquidity provider (LP) reward, also can use the LP tokens in Geyser mortgage (background reading: Placehoder “liquidity proof”). Users can provide more liquidity in Uniswap and mortgage in Geyser to get more AMPL reward shares through the project.

It should be noted that the block chain traceability not only the balance of assets, also tracks assets held time, which can be described as the killer application. What effect does this have on the Ampleforth incentive program? Geyser in addition to the number of award will be based on mobility, but also reward the user Geyser mortgage period, 90 days or more mortgages available up to three times reward.

Therefore, it can be said that Geyser’s success is not only based on liquidity incentives. Increase the time component to reward users who have not withdrawn liquid assets. This brings about a ~70% retention rate since the launch of Geyser, which is very surprising.

Geyser has three types of incentives: 1. Uniswap LP rewards; 2. Deposit amount rewards; 3. Deposit period rewards. This is a huge concern to Ampleforth, also have some second-order effects (second order effect) of Ampleforth system.

Geyer is the impact of a substantial increase in AMPL holders more dispersed. In June 2018, Ampleforth was only a private project, and the network was controlled only by the team, consultants and a small number of investors. June 2019, Ampleforth in Bitfinex IEO just seven seconds to raise $ 5 million, so the headlines. In June 2020, about four thousand Ethereum wallets held AMPL, after which Geyser appeared.

To complete this article, address AMPL wallet holds nearly twenty thousand Another effect of Geyser on Ampleforth is that AMPL’s liquidity has been greatly improved. The AMPL-ETH Uniswap fund pool is the largest fund pool on Uniswap in the past 30 days, with a total amount of 45 million U.S. dollars , bringing great market depth to trading pairs. For a period of time, the AMPL-ETH fund pool accounted for more than half of the trading volume of the day and one third of Uniswap’s total liquidity. July AMPL-ETH amounted to half a billion dollars in Uniswap transactions.

Ampleforth commodity currencies are optimized use cases, we need reliable and reliable currency liquidity. This stimulates the establishment of a deep pool of liquidity incentives. After the success of Geyser, the Ampleforth Foundation recently announced that 23.5% of the network tokens will be used to start supporting Geyer or similar projects in the next ten years, focusing on decentralization, liquidity, network health and extensive rewards.

Short-term speculation

The second demand is short-term investments, that is FOMO, hot, trend trading and so on. The concept is that demand brings demand. Assets gained momentum and more speculators poured in to make quick money. It should be noted that it would certainly push up the value AMPL network, but also unsustainable.

A project should not be abandoned because of speculation. On the BTC and ETH have the same speculative demand. Every time this appears, the media will say that Bitcoin is dead, and we don’t like to make the same conclusions about AMPL.

The up-and-down cycle is a major characteristic of the maturity of cryptocurrencies. Bitcoin has experienced a surge in demand in 2011, 2013, and 2017. Each time it was accompanied by a sharp drop, and then a new high. For example, in the fourth quarter of 2013, the BTC network was worth 1.5 billion U.S. dollars, and then soared to 13 billion U.S. dollars during the quarter. It was cut in the first quarter of 2014 and fell by half again in 2015. In 2015, the market value has been between 3 to 4 billion U.S. dollars and never returned to 1.5 billion U.S. dollars. At the beginning of 2017, the market value of BTC was 15 billion U.S. dollars, soared to 300 billion U.S. dollars in the fourth quarter, and then remained at 60 to 70 billion U.S. dollars at the end of 2018 and early 2019. No more fell 15 billion dollars. An important indicator for evaluating AMPL is that after demand increases and decreases , the value of the AMPL network is higher.

Only time will prove the vitality of Ampleforth. Long-term success or failure depends on the applicability of the agreement and the vitality of the community . Speculation is only a window for the market to understand the applicability, but short-term fluctuations in network value can also distract attention.

Gauntlet Network released a research report in August 2020 to analyze Ampleforth’s transactions from January 3, 2020 to June 22, 2020, and simulate different short-term trading strategies in the Ampleforth system and evaluate the effects. The simulated arbitrage trader, balance trader, mean reversion trader, trend trader and other market participants hypothesized the allocation, and the results found that the Rebase arbitrage trading strategy is the only trading model with considerable profitability. The data simulation evaluation in the second half of 2020 will be very interesting.

AMPL’s economic utility rises

If the asset is no economic effect, the agreement itself or short-term speculative short-term incentives are not sustainable. To achieve sustainability, Ampleforth agreement (and AMPL) must be persuasive economic products, convincing users that the community viscosity.

Since the birth of Bitcoin, an open network, can not be tampered with, books transparent, verifiable coupled with the scarcity thinking individuals and institutions global digital value for money and remodeling.

Many other encryption asset network optimization commodity currencies also use cases. Using Bitcoin’s economic design functions (such as a fixed total), while iterating other functions (such as privacy, governance, consensus), we have seen many different experiments to create new types of cryptocurrencies. Supply is just another dimension of design, not the subject of many experiments. This is mainly because the supply has increased. If it is not distributed to the holders in proportion, it will be detrimental to the holders’ assets.

The supply of fixed assets, assets held fluctuations in demand fully reflected in the price. Supply elasticity assets such as AMPL absorb positive or negative demand shocks through supply increases and decreases, and keep prices relatively stable. The important thing is that the holder’s ” wealth ” (quantity of units * price) will still change with fluctuations in demand, but volatility affects the quantity of units rather than prices. This checks that the old adage, rarely reduce financial risks, are more moved to other places.

Is it effective to shift price volatility from unit volume? The answer is maybe yes. But consider three functions of reliable money:

  1. Unit of Account (UoA). “A piece of candy 1 AMPL”
  2. Medium of exchange (MoE). “Okay. I’m happy to accept AMPL to buy sugar.”
  3. Store of Value (SoV). “I want to store AMPL in the cold wallet for ten years before buying sugar”

We note that, prior to 1971, using gold-control base money supply of the dollar, but gold inconvenience for the exchange of value, unit of account is based on gold rather than the dollar gold itself. Encryption wallet and currency exchange infrastructure continued evolution, mergers, asset exchange gradually becomes frictionless, conversion costs tend to zero, the final conversion costs for users negligible.

This untie the characteristics of reliable currency. Fixed with respect to the total amount of assets, asset supply elasticity denominated as useful, while the depth of the flow cell might be the best assets of the medium of exchange. If AMPL can reach a stable target state, it can represent the optimal pricing unit, because the target price will increase with the inflation of the legal currency.

Among the three functions of reliable currency , the value storage feature is the most difficult to predict for early experimental assets. Since volatility affects the unit volume rather than the price, the price of candy may still be 1 AMPL after ten years, but you may have 0.01 AMPL or 500 AMPL when you open your wallet. 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.

To prove a store of value properties, AMPL need to achieve stability, long-term prices remain in equilibrium price range, but really needs a change (not speculative) deviation caused by the occasional price range. For example, a popular app adds AMPL as a payable currency to promote AMPL demand. In theory, the price will exceed the price range based on changes in demand, increase supply to meet market demand, and then return to a new balance.

The steady state cannot be achieved through a large number of speculative transactions, but must be achieved through the integration of non-speculative use of AMPL. In addition, there are also psychological factors, AMPL will believe it to market in a steady state, it will reach a steady state. The characteristic of the stable state is that there is continuous buying support below the target price, continuous selling pressure above the target price, and the price is in the equilibrium range. AMPL long-term holders believe that a stable state will eventually be achieved and high network value will be achieved.

Although AMPL is still in its early stages, it has been operating as expected:

  • Flexible supply . Over the past year, AMPL supply continued to expand.
  • Low volatility . Except for the extremely low demand from September to October 2019 and the extremely high demand in July 2020, AMPL prices have always fluctuated between US$0.5 and US$1.5. Although it is still a bit offset from the balance range, the price of assets with a relatively fixed supply is relatively stable.
  • Disassociation . Gauntlet’s August 2020 report concluded that according to market capital, AMPL historical returns are not related to BTC and ETH in different time periods. We will closely observe the correlation with other assets and the value growth of Ampleforth’s network. The important thing is that AMPL (currency unit) reaches a stable state. As the base currency, it must accompany Ampleforth (system) to reach the midpoint of credibility. In the next few years, its decentralization will be reflected by the market in several features, such as protocol changes, oracle quotations, and continuous project development.

Some projects strive to achieve progressive decentralization and solve these challenges by constructing community governance processes. Other projects, over time, more reliability protocol eliminating human rely on regulation. The Ampleforth team recently announced that the protocol ” emergency pause ” functions (setRebasePaused and setTokenPaused) have been removed from the protocol smart contract. With the evolution of the system, the early team is committed to minimize human governance.

As you know, shells, stones, gold, and all other types of legal tender currency long-term use of market-based confidence. The question is whether Ampleforth has created a credible economic product, and over time, will the credibility of AMPL as a commodity currency be accepted and used in the economy?

To put it more complicated, the final form of currency in the future may not be the traditional reliable currency structure (pricing unit, medium of exchange, value store) simply mapped on the chain. In the new world we are exploring today, assets can be digitally “encapsulated” and programmed, allowing us to exchange, price, and store value with minimal friction and transaction costs. We rely on monetary function may eventually go through unbundling, then tied in the future we can not understand the form of presentation.

Welcome to join this monetary experiment.