Table Of Contents
In developing the Ampleforth protocol, we explored a wide range of questions around the open areas of research in money today, and found the concept of "denationalized money” to be helpful for understanding how cryptocurrencies fit into a broader context.
Drawing the connection between a technology innovation (cryptocurrencies) and an economic concept (denationalized money) allows us to benefit from the rich academic literature devoted to understanding where modern day monies face their greatest difficulties and where independent monies create value.
The mandate of denationalized money is to check against inflation and boom-bust cycles. Both of these forces emerge from otherwise highly effective central banking systems, which is why economists have assigned the task of checking them to monetary-assets that operate independently of government. Today's decentralized cryptocurrencies are uniquely suited to this role, and in our opinion it will be their most important economic function.
2. Thousands of Cryptocurrencies Are Coupled To BTC's Price Movement Pattern
Bitcoin's lack of connection to traditional assets brings diversity to a highly interdependent global economy by giving users the option to exit into an asset outside the traditional cycle of consumption and production.
However, since Bitcoin, thousands of new cryptocurrencies have failed to add any diversity to the ecosystem because they are either connected to traditional assets or their price movements follow Bitcoin too closely. Economically, it is as if only one new asset has been introduced because adding more identically-designed cryptocurrencies offers no marginal optionality.
3. AMPL introduces a Second Movement Pattern
AMPL brings diversity to the ecosystem through a countercyclical supply policy that automatically and proportionally adjusts supply across wallets in response to demand.
This policy was designed to be the simplest direct solution to the supply inelasticity problem that limits assets like gold and bitcoin. Supply changes expand directly to wallets and contract directly from wallets, with no bank or marketplace in between.
Later, we discovered the AMPL solution has the tremendous additional benefit of creating a new asset movement pattern unlike any existing cryptocurrency or traditional asset.
AMPL's non-dilutive supply changes introduce a fundamentally different set of incentives for traders because changes in demand are expressed by the number of AMPL held in addition to price. As a result, profit-maximizing actors are compelled to devise new trading strategies. This new behavior generates a step-function-like movement pattern that is distinct from Bitcoin and traditional assets.
4. Today AMPL is a New DeFi Building Block
The high correlations prevalent in today's cryptocurrencies create systematic risk in the decentralized finance (DeFi) ecosystem because in such environments, aggregate volatility cannot be reduced using baskets of assets. AMPL, however, creates diversity in a basket of decentralized assets. This means it can be used to construct more robust instruments in the DeFi ecosystem. It is a new primitive building block.
Today’s decentralized assets, BTC and ETH, are the primitive building blocks of the new DeFi economy. These assets can be arranged to construct instruments for lending, debt, synthetic equities, and more. But their limitations lie in their volatility and high correlation to one another.
It is a common practice today for DeFi applications to overcollateralize in order to account for the volatility inherent in permissionless collateral assets, but still there are high risks of liquidation. Unless diversified baskets of decentralized assets can be constructed, many DeFi applications will either be unreliable or they will be forced to use permissioned centralized assets as collateral.
AMPL Minimizes Liquidation Risk
When all the collateral assets in a debt contract move in perfect synchrony, the risk of liquidation is high because no asset can offset the changes in demand for another. In Economics, this is referred to as non-diversifiable risk or systematic risk.
AMPL's differentiated movement pattern reduces risk of autoliquidation when used in combination with today's decentralized assets as collateral. Most importantly it does so without central authority.
5. Tomorrow AMPL Can Be A Better Bitcoin
The AMPL protocol automatically translates price-volatility into supply-volatility. But it is profit-seeking traders, acting on incentives, who propagate these supply changes back into price. In other words price informs supply algorithmically, while supply informs price behaviorally, in a cycle.
This cycle takes the form of a step-function-like movement pattern that alternates between static periods, where price and supply are in equilibrium, and dynamic periods where the market searches for its next equilibrium.
Early on, while AMPL's market cap is small, wallet balances will be volatile. Dynamic periods will occur frequently as the system snaps from one supply equilibrium to the next, reflecting the rapid changes in demand for AMPL. In this period of its lifecycle, AMPL benefits from use as a diversifying asset to be held in investment portfolios, and from use as a decentralized collateral asset.
Later on, as AMPL's market cap grows, equilibrium periods will last for longer stretches of time. In these static periods AMPL is relatively stable in both price and wallet balance. At saturation, these static periods would only be interrupted by macroeconomic changes in demand. These macroeconomic interruptions, however unpredictable, would actually be desirable because such elasticity prevents demand shocks from cascading into liquidity crunches and deflationary spirals.
Bitcoin will become less volatile at saturation, fully stabilizing in supply, but will never be stable in price. And like other fixed supply assets Bitcoin will be vulnerable to sudden shocks in demand, which limits the size and scope of economies that can be built ontop of it.
Lastly, we'll note that even when supply is volatile, AMPL can be used as a unit of account. Use in this regard would be major step forward for crytocurrencies, because it means the currency would have a real-exchange-rate (ie: 1 AMPL for 1 can of soda) in addition to a nominal-exchange-rate (ie: 10000 AMPL for 1 BTC).
Because real-exchange-rates are much more resistant to change than nominal-exchange-rates, the use of a currency for denomination contributes to what Economists refer to as nominal rigidity (or price and wage stickiness).
This stickiness further allows currencies like the USD to resist macroeconomic shocks, and has played a major role in the longevity of currencies throughout history. If AMPL were at the current-day maturity level of Bitcoin, we would expect that it would have already seen meaningful use in denomination.
In the long-run AMPL becomes a simple bankless asset, like Bitcoin, except it can be used for denomination and adapts to economic shocks.
6. Monetary Design Guidelines
There are highly evolved economic frameworks for how to think about monetary design. We explored them. The following design guidelines best leverage the qualities of decentralized money and define AMPL.
Rules over Discretion
Rules-based policies allow for predictable and measurable actions and responses. This is good for checking against discretionary economic policies.
Monies over Banks
Monies are simple, banks are complex. This is good for decentralizing governance.
Elasticity over Inelasticity
Supply elasticity allows for currencies to adapt to economic shocks. This is good for everyone.