EP21: The Economics Design of AMPL Token
New global digital currency 2.0. Bye bye USD.
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TLDR below. This is not financial advice.
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Ampleforth is very interesting because it could definitely become a global base currency moving forward. Instead of USD, imagine a currency that is used by everyone in the world to trade. Instead of having the world currency (USD) being tied to the internal politics of US, this new currency is neutral and changes its monetary supply based on the global demand of money.
In this episode, we will uncover the design of Ampleforth works, the economic considerations and how it plays a role in the DeFi space.
1. What is Ampleforth (AMPL)
Ampleforth wants to be a token with a stable value.
How? They do this with an automated governance using code, by internalising the price volatility in the secondary market.
Explain more? The code is 2 math functions. (1) It calculates the price difference between the "ideal price" USD$1 and the actual exchange rate now (e.g. US$1.15). Then it mints more tokens, so that the price goes back down to US$1. (2) It doesn't do this suddenly, token changes happen over a period of 10 days. We call this supply smoothing.
So what's cool about it? It can be used as collaterals in the DeFi projects. It's also not strictly pegged to a fiat currency (e.g. DAI with USD), so it makes it more independent and useful in the long run. Basically, Ampleforth is the new global currency without central bank.
Can I earn money with AMPL? It is possible. For example, doing arbitrage trading with price differences, because you know that prices will always go back to US$1.
2. AMPL vs AAVE, COMP, USD
You can't compare AMPL with AAVE or COMP.
because they have different token functions.
AMPL has a money function and AAVE or COMP has a utility function. It's like comparing USD with American Airlines miles system. It's similar, but not the same.
But you can compare AMPL with USD.
because they both have money functions.
AMPL has an independent monetary policy while USD clearly does not.
USD is governed by the central bank (aka FED). It's a bunch of smart people in a room, deciding how much money should be available in the economy, the interest rates, the lending rates, etc.
AMPL is governed by code instead.
Is that good or bad? It really depends. It's good because economists are always looking for solutions to get an independent neutral money, used by everyone. We call this the Triffin Dilemma. However, because it is only governed by code, it's possible to affect the secondary market in a short period, if you have enough tokens to manipulate the code.
3. Economics Design of Ampleforth
To increase network effects and demand for AMPL, there are 2 systems in place
increase the use of AMPL as collaterals for DeFi projects
use of Geyser program for people to stake their tokens
To reduce insane fluctuation in prices, a supply smoothing function is applied, so the change in token quantity is done over a period of 10 days.
To become more politically independent and to tap onto the benefits of a digital network, the information (prices, volatility, decision making) is done by oracles and machines.
Math is used to define the rules of the game, for the system to abide by
When prices change, it affects the amount of tokens available. This directly affects the number of tokens you have in your wallet.
Get smart: this is where most people don't understand the system. They think that AMPL is a scam. Because tokens can be removed. See below (5. Valuation of Ampleforth) for further explanation.
Oracles are used to take in prices (via exchange rates of AMPL) and internalise that information.
How? It changes the amount of of AMPL supply, in response to the prices.
If prices are too high: print more AMPL
If prices are too low: burn some AMPL
Instead of chartallist money like USD, AMPL is metallist money (aka commodity money, like gold). But we call it synthetic or digital metallist money.
Machines (math mentioned in #3) define the monetary policy
Uses Countercyclical approach (see points above on when it prints or burns AMPL)
Reduce economic fluctuations (see mechanism design above, on internalising price differences and changing supply, so value of 1 AMPL is about US$1)
AMPL's value is allowed to fluctuate between ±5% of US$1*
this US$1 is pegged to the economic definition of "Consumer Price Index (CPI) for the 2019 dollar"
Supply smooth is used so that we prevent supply side inflation (or shocks). So if there is an increase in tokens by 15%, the increase will happen over 10 days. Each day will increase by 1.5% instead.
It's also interesting because it has low correlation to Crypto-assets price fluctuations.
Get smart: this is great for being part of the portfolio
Big VCs own a significant percentage of AMPL tokens that is vest
Get smart: this can be dangerous when the vesting period is over and they dump it in the market
4. Monetary Policy
There are 3 situations in the monetary policy:
Graphs and explanations are in the video.
Prices will remain the same in the long-run
But supply will increase
Market cap will increase in the long-run
Prices will remain the same in the long-run
But supply will decrease
Market cap will decrease in the long-run
Combine all these 3 states together, so you can visualise what the general shape of the supply and price and market cap looks like.
5. Valuation of Ampleforth
The model for AMPL is different from other token projects, because instead of defining your valuation via prices, it is defined by the proportion of network held.
Let's say you own 0.0000618% of the network by market cap valuation. That is US$1 with 10,000 tokens.
Now, prices increase to US$1.15. The total tokens increase. You also increase your token holding, while the value of tokens decrease.
You will still own the same percentage of the network.
The math to think about here is invariant. We talked about this in the AMM episode.
Open to Your Suggestion
I'm picking up the top 5 points that is most relevant in the Premium version. Please let me know if you are keen in the whole transcript instead.
Ampleforth is fascinating because it has the potential to become the global base money of the future. This is done by having governance in code, and it internalises any currency volatility to produce countercylical pressures with its monetary policy.
Get smart: This is unlike the current global currency (USD) that we have, so this model has a potential to succeed.
Get smarter: The problem is arguably how the distribution of tokens are with certain key stakeholders. Could affect token holders in the long-run.