AMPL uses supply elasticity to absorb volatility
The governance token for the rebasing cryptocurrency Ampleforth (AMPL) tripled in value on Friday ahead of the launch of its associated algorithmic stablecoin SPOT.
FORTH rose from $3.80 to a high of $12.50 on Binance, the world’s largest cryptocurrency exchange, before pulling back to $8.27 by 13:30 GMT on July 29, 2022.
The cause of the dramatic price action was not immediately clear, though Ampleforth’s developers are close to publishing the white paper for their algorithmic stablecoin SPOT—described as a “perpetual note backed by fully collateralized AMPL derivatives”.
It also follows the launch of the affiliated Buttonwood Foundation, which provides a novel marketplace for long-term lending through collateralized bond tranches.
To date, most decentralized finance (DeFi) protocols focus on short-term lending that carries a risk of liquidation during periods of high volatility—something Buttonwood claims to sidestep.
FORTH was airdropped to participants in the Ampleforth ecosystem in April 2021. Its market cap peaked at $272 million the following month, before hitting a low of just $35 million in May 2022. Based on a token price of $8.27, its market cap is currently $127 million.
Governance tokens allow holders to vote on key decisions relating to the strategic development and daily operations of an associated cryptocurrency.
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The Ampleforth ecosystem
AMPL is a rebasing token conceived by founders Evan Kuo and Brandon Iles as a decentralized unit of account. Its supply elasticity means that individual wallet balances increase or decrease based on the token’s proximity to a target price—specifically, the CPI-adjusted value of one US dollar in 2019 (currently $1.11).
If the 24-hour volume-weighted average price of AMPL stays within 5% of this moving target, then supply remains constant. But if it exceeds the upper or lower threshold then all balances rise or fall in a proportionally equal way according to a set formula.
The number of tokens that each person holds therefore changes automatically, while their percentage stake in the overall ecosystem remains constant.
The purpose of this mechanism is to shift volatility away from price and onto supply—in theory, guaranteeing that AMPL’s long-term average price naturally orbits around a moving target.
Three years after AMPL was launched, this broad aspiration appears to have been fulfilled.
AMPL’s USD price has orbited close to $1 throughout its three-year history, despite the token’s … [+] market cap collapsing from a high of $603 million to a low of $32 million. Rather than impacting price, the pain of that contraction has primarily been absorbed through supply changes.
However, the bigger goal of using elastic supply to unlock a self-regulating, inflation-resistant cryptocurrency—essentially, an algorithmic stablecoin that preserves USD value without actually being backed by USD reserves—remains elusive and, in many people’s minds, unachievable.
The hope is that SPOT will make progress on that front by collateralizing senior bond tranches of AMPL to achieve relative price stability.
We’ll need to wait for the publication of the SPOT white paper to understand more about the team’s approach. But their overarching strategy appears to be diluting volatility by harnessing the portion of AMPL’s token value that has, to date, been shielded by its rebasing forces.
Put another way, SPOT will likely aim to absorb demand shocks through supply changes to its underlying collateral—allowing extreme market conditions to manifest themselves in a way that punishes or benefits AMPL holders (who would be exposed to, let’s say, 80% of the underlying token’s risk), without significantly impacting SPOT holders (whose exposure would be restricted to 20% senior tranches).
The Ampleforth ecosystem also includes a fourth token, WAMPL (Wrapped Ampleforth), which converts AMPL’s supply volatility back into pure price volatility.
Its purpose is to give investors a more intuitive, supply-stable way of investing in the ecosystem.
Financial disclosure: the author is a long-term holder of AMPL and FORTH tokens. He will not buy or sell either token in the 90 days following the publication of this article.