- Won't bitcoin eventually stabilize?
- How does this solve the inflation problem?
- How do you add and remove supply?
- How does this differ from other stablecoins?
- What if the peg breaks?
- What about hold pressure?
- Does this rely on the Quantity Theory of Money?
- Is this even a stablecoin?
- Isn't inflation a good thing?
- What if blockchains never scale?
- Why will this be a better near term store of value than a fixed supply token?
1. Won't bitcoin eventually stabilize?
Bitcoin's fixed supply model makes for great independent long term value storage, but is
also highly limiting. At saturation, bitcoin's volatility will likely reflect uncertainties
in other markets the way gold and other metals do.
Moreover, the fixed supply model inhibits its use as a unit of account, making it difficult to use for menu and wage denomination. Price and wage stickiness are important factors because they create nominal stickiness, a key component in the stabilization of fiat currencies.
If however, bitcoin was able to benefit from price stickiness through menu and wage denomination the way gold was able to (being a mandated reserve currency)—this would not have a long lasting effect. Historically, we've seen that in periods of heavy spending a gold backed or fixed supply currency leads to price increases, causing people to hoard in a negative self reinforcing cycle.
2. How does this solve the inflation problem?
By inflating and deflating to and from coin holders directly, our protocol is able to stabilize price while remaining non-dilutive to its holders. Also, because the currency is entirely game theoretic (requiring no collateralization) the price target can and will be adjusted to target a CPI or basket of goods—such that no government monetary policy can influence its purchasing power.
3. How do you add and remove supply?
The protocol adds and removes supply by adjusting a scalar conversion rate between an internal fixed denonimation of supply and a public elastic denomination of supply. And then by overwriting the public ERC20 functions balanceOf(), transferFrom(), transfer(), and approve(). The benefit of this approach is we can update all wallet balances with a single transaction simply by updating the splitRatio, instead of executing a transaction for every wallet. For more information see this blog entry.
4. How does this differ from other stablecoins?
Broadly our protocol creates a money that 1) solves the inflation problem, 2) has a speculative interest, and 3) maintains a stable unit of account. We are actually much more analagous to bitcoin except the protocol maintains a price stable unit of account. For more information on our motivations here see our about page and whitepaper.
5. What if the peg breaks?
This is a common question for stablecoins that is less relevant for Ampleforth, but still worth discussing. In the case of tokens like Tether, a price deviation of 25% might be irrecoverable. This is because the promise of Tether is that one fiat dollar will be warehoused for every USDT token minted. As a result, a substantial price deviation would only occur if faith in that promise was severely shaken.
Ampleforth promises simply that it will inflate when the price exchange rate is over one and deflate when the price exchange rate is under one. Price stability is a property that eventually emerges from this promise. Like Bitcoin, it begins as a volatile store of value token; and like Bitcoin Ampleforth can recover from almost any state. In this regard it is extremely fault tolerant. For more information, see our whitepaper.
6. What about hold pressure?
When we were on the gold-standard, prices and wages were effectively being denominated in gold. At this time notes (and by extension gold) served as an effective near term store of value.
However, when the economy is outpacing the rate of gold production and requires more money to meet the needs of commerce, gold's inelastic supply leads to price increases that causes people to hoard. This exacerbates the situation in a negative self-reinforcing cycle. Price stickiness can only counter the deflationary nature of gold for so long before either supply needs to change, or prices need to change.
In the world of a symmetric elastic supply, people are given a game theoretic incentive not to over-hoard. If there's not enough supply we automatically inflate and engage holders and traders in a race to sell, spend, or otherwise deploy, which pushes people through what could have been a potential hoarding cycle quickly.
7. Does this rely on the Quantity Theory of Money?
The Ampleforth protocol establishes a set of initial conditions and incentives for the network, but it’s actually the actors that create stability. We make use of QTM to algorithmically set supply targets because the promise of elastic supply needs to be strictly enforced, but changing supply does not mean that traders will immediately and correspondingly adjust their bids.
In practice, traders will respond to supply changes based on how quickly or slowly they think others will respond. Our key assumption is that traders will eventually seek to buy low and sell high. Read more about QTM and convergence in the whitepaper.
8. Is this even a stablecoin?
Our goal with uFragments is to create the least greedy system capable of supporting all three functions of money. Simply bringing fiat to the blockchain (or recreating fiat on the blockchain) does not mean that we have created better money. Distributed Ledger technology provides tools that have not been available to monetary authorities before, so we can react faster, more precisely, and in ways that fiat cannot.
uFragments moves volatility from unit price to unit count. While the denominated value of a uFragments balance can change, the purchasing power of fiat balances can also fluctuate but because of the way it’s denominated is difficult to see unless you travel abroad. The USD-Swiss Franc for example has moved between .85 and 1.03 over the last 5 years. uFragments simply makes this fully transparent.
9. Isn't inflation a good thing?
There are many reasons why a local economy might choose to target increased or decreased rates of inflation. These can include increasing the money supply to support the economic needs of trade, or stimulating the economy during a downturn. Inflation in today’s economy is very difficult to enact and occurs through a number of complex and indirect mechanisms trusted to a small number of highly skilled authorities.
Even when inflation is managed effectively for a local economy, conflicts naturally arise between differing needs of global economies—this is referred to as the Triffin Dilemma. When countries hold outside currencies as reserve currencies, there results a natural conflict of interest between short term domestic objectives and long term international objectives. This is especially true with the outsized role of the US Dollar as a world reserve currency, as was seen during the 2007-08 financial crisis.
The promise of an independent money is that it can manage its money supply only in response to demand and not be subject to outside bias. By disentangling these complex global dependencies, we can help reduce the systemic risks of global economic shock.
10. What if blockchains never scale?
A good store of value has utility beyond transactional use cases. For example gold has a market cap over $7 trillion, yet it sees almost no transactional activity for goods and services. Similarly, Bitcoin’s market cap is over $100 billion despite only supporting 7 transactions per second. Generally, the higher the transaction volume a currency has in an economy the lower the market cap that currency is required to have to support that economic activity. uFragments, like Bitcoin, can be widely successful even if blockchains never scale beyond current levels.
11. Why will this be a better near term store of value than a fixed supply token?
We believe that the total demand for Fragments will become more stable over time because of its stable unit of account. This property unlocks many more use cases (and hence new sources of demand) that don’t exist for other coins with a floating price.
The price stable unit of account allows for menu and contract denomination in Fragments which in turn can lead to wage and price stickiness, two of the major factors that contribute to the near term stability of fiat today.
Today, many people hold BTC for speculative and idealistic reasons, and as a result often feel compelled to settle payments and purchase goods in Bitcoin. Unfortunately, the price volatility makes it incredibly inconvenient for parties and merchants to use in this manner, which inhibits transactional demand and prevents price stickiness from taking hold.
When people can choose to either spend or sell their money, as in the case with fiat, we see a normalizing pressure that eases out temporary differences between nominal and real exchange rates leading to greater near-term stability.
We expect that over time, the speculative nature will diminish as we reach saturation and represent a decreasing percentage of total demand as transactional demand increases. For a quick take on real vs nominal exchange rates and price stickiness see the following entry.