AmpleForth: A Real Algorithmic StableCoin? 

 

For those who know me, I dabble in the pedantic.

 

In crypto, I don’t think any class of projects represents that “unsexy” nature like Stablecoins.

 

Yes, there isn’t much exciting on the surface about an asset that doesn’t change value, but stablecoins represent, to me, the bridge between the legacy financial system and our new decentralized world.

In so much as that noble goal is sought, we often see failures or misguided efforts to bring a solvent model to the table.

 

Tether and MakerDAO in the past week have shown why this can go off the rails.

 

Tether is a stablecoin that is (supposed to be) backed 1 to 1 with a fiat backing. Shady practices and simply the faults of a centralized system have shown why this can be dangerous.

 

MakerDAO and its stablecoin, DAI, are a different type of stable asset which is collateralized by crypto assets and soon other asset classes. However, this is a very complicated system and balancing the dollar peg is proving to be a Herculean task.  

 

So, this is why the third type of stable asset interest me: algorithmic.

 

In principle, it’s meant to function as Bitcoin does; autonomously enforcing the parameters that allow the system to function.

 

But, to have that in the context of an asset that is neither deflationarty nor inflationary (unless it wants to be) is quite interesting.

 

And why do we care?

 

Because having a solvent stable asset will allow us to build the bridge between the old financial system and the new one we envision. It simply won’t happen without it.

 

And that’s the problem with algorithmic stable assets thus far: they haven’t worked.

 

That’s why I’m interested in a project that recently came to my attention that aims to solve this problem: Ampleforth.

 

Ample isn’t a truly decentralized project, so far as I can tell. That immediately put me off the project. Additionally, their aim to fundraise support for the project team using an IEO also gave me concern

 

But, their approach is nonetheless quite interesting. They peg themselves as a smart commodity money.

 

From their website:

 

Founded with a mission to create fair, politically independent money, the protocol’s creators noticed that commodity-monies like gold and silver are naturally fair and independent.

 

Unfortunately, such commodity-monies cannot efficiently respond to changes in demand, making them a poor substitute for central-bank-money.

 

To address this shortcoming, the project’s founders designed a synthetic commodity-money that propagates price-information into supply, much like how thermal expansion propagates nearby kinetic energy into a material’s volume in the natural world.

 

From their whitepaper abstract:

 

Synthetic commodities, such as Bitcoin, have thus far demonstrated low correlation with stocks, currencies, and precious metals. However, today’s synthetics are also highly correlated with each other and with Bitcoin. The natural question to ask is: can a synthetic commodity have low correlation with both Bitcoin and traditional asset groups? In this paper, we . . .  suggest that the Ampleforth protocol . . . will produce a step-function-like volatility fingerprint that is distinct from existing synthetics.

So how does it work?

 

The Ampleforth protocol always seeks a price-supply equilibrium, and will automatically enter a state of unrest until it finds one. To illustrate this, we can walk through a simple example:

>> Equilibrium 1:

Alice has 1 Ample worth $1.

 

>> Demand Doubles:

Alice has 1 Ample worth $2.

 

>> Equilibrium 2:

Alice has 2 Amples each worth $1.

 

When demand changes, the system seeks a new equilibrium point by universally expanding to, or contracting from holders.

 

In the case above, when demand suddenly increases, the system seeks a new price-supply equilibrium, such that Alice ends up with 2 Amples each worth $1. And the opposite would be true if demand decreased.

Interesting.

 

Whether Alice holds 1 Ample worth $2, or 2 Amples each worth $1, makes no difference in terms of net balance, but there are two key benefits to seeking price-supply equilibrium:

 

1. It applies countercyclical pressure
2. It encourages a stable unit price

 

Together these properties allow Amples to avoid the deflationary problems of fixed-supply commodities, without requiring a central authority.

 

Ok, so the basic premise here is that Ampleforth is going to provide a means of self-correcting and self-equalizing, and so far as the protocol works it should provide a stable asset that is a compelling alternative to the current offerings.

 

At least, that’s the hope.

 

What is not entirely clear from their whitepaper and website is the timing. And functionality. Two pretty important things.

 

Their roadmap is not dated, and their whitepaper, while functionally interesting, is not deep.

 

Maker’s whitepaper, in comparison, embodies both depth and breadth. It doesn’t rely too heavily on CompSci jargon nor does it use vague graphics to illustrate vague points.

 

This is not to accuse Ampleforth of nefarious deeds; quite the opposite.

 

But, what’s clear is this is a new project that is untested and unchallenged. The space they are breaking into is both crowded and empty, due to their unique proposition.

 

All that said, I look forward to what Ample can do, where it goes after its fundraising and IEO, and what other algorithmic stable assets it can inspire.