Ampleforth: An Algorithmic Rebase Cryptocurrency

Can a cryptocurrency be elastic and stable at the same time? Learn how Ampleforth breaks new ground in blockchain.

Summary

While asset-backed and crypto-collateralized stablecoins represent a pillar of the digital economy, algorithmically driven assets like Ampleforth are emerging with a more decentralized approach that is less reflective of legacy financial processes. Ampleforth’s AMPL currency maintains price stability with a flexible supply. It achieves this via a process of rebasing — which adjusts the supply of AMPL on a daily basis, providing more price stability than fixed-supply cryptocurrencies.

Is AMPL a Stablecoin?

Stablecoins are a form of crypto asset designed to maintain a particular price. Most often this means keeping parity with the U.S. dollar or another fiat currency, but can also refer to cryptocurrencies built to maintain a more general level of stability as well. The mechanisms used to ensure price stability differ across the stablecoin ecosystem. Stablecoins like U.S. Dollar Coin (USDC) and Gemini Dollar (GUSD) are backed by audited holdings of U.S. dollars. Crypto assets like PAX Gold (PAXG) are another type of asset-backed stablecoin that represents physical commodities — in this case gold.

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Alternatively, crypto-backed stablecoins like DAI use collateralization to achieve price stability whereby users contribute crypto assets as collateral and receive DAI in return. In addition to asset-backed and crypto-collateralized stablecoins, algorithmic stablecoins are an emerging sub-sector of stablecoin protocols that achieve price stability using mechanisms that automatically adjust for supply and demand.

While Ampleforth (AMPL) is similar to algorithmic stablecoin protocols operating on the Ethereum blockchain, it is not pegged to the U.S. dollar. Rather than using crypto, fiat, or commodities as collateral, the Ampleforth protocol adjusts its AMPL crypto supply every 24 hours in a process called “rebasing” to maintain a stable price. To understand how algorithmic protocols like Ampleforth function, a review of traditional monetary policy is a good place to start.

The Ampleforth Stable Monetary Policy

Almost every nation uses a central bank to manage economic health. Central banks achieve this by pulling the levers of fiscal and monetary policy to minimize the impact of economic cycles. In general, fiscal policy refers to government spending and taxation policies. In contrast, monetary policy refers to central bank actions that determine borrowing costs and the money supply. In the absence of government spending and taxation in the decentralized ecosystem, monetary policy is a guiding principle for algorithmic stablecoins.

Traditional monetary policy allows governments to print more fiat currency or remove it from circulation — depending on demand. Unlike the elastic supply of fiat currency, many cryptocurrencies like bitcoin have a fixed supply, rendering them inelastic. Although there are benefits to inelastic supply, the resulting price volatility can be problematic. Conversely, an elastic money supply can also result in dilution and loss of value. This occurs when new money is printed and put into circulation, which dilutes the proportion of the total supply of dollars held by an entity — effectively making each unit of currency less valuable.

Ampleforth’s stablecoin AMPL solves these issues as it is both elastic and non-dilutive. It aims to maintain its value at $1 by adjusting its own supply dynamically on a daily basis. The Ampleforth crypto protocol achieves this by applying supply adjustments across the balances of all wallet holders. On the Ampleforth crypto platform, three scenarios trigger supply adjustments to its AMPL currency.

The Three States of AMPL

Although algorithmic stablecoins use supply-regulating mechanisms, Ampleforth is unique because its overall supply remains elastic. As a result, ownership of AMPL tokens is never diluted, resulting in a supply of Ampleforth stablecoins that persists in three states:

Expanding Supply: If the price of AMPL exceeds $1, more tokens are released into the economy, decreasing the value of each token.
Contracting Supply: If the price of AMPL falls below $1, tokens are taken out of circulation to increase each token’s value.
Equilibrium: In a state of equilibrium, the economy is in balance, and the price of 1 AMPL is exactly $1.

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Anyone who owns AMPL tokens will see their wallet balance change each day at 2:00 UTC in response to the Ampleforth economy’s state and prevailing token price. To determine if token supply adjustments are necessary, the protocol uses Chainlink, a blockchain oracle data provider built on Ethereum, to supply price data. It’s worth noting that Ampleforth’s algorithmic token supply management is an emergent technology, and there have been fluctuations in its market price throughout its history — dropping as low as $0.31 in 2019, and reaching as high a $3.99 in 2020.

Ampleforth Protocol Stable Contracts

AMPL daily supply adjustments are known as rebases, and are managed by smart contracts. Because the Ampleforth network maintains supply elasticity and protects against dilution to stabilize AMPL’s value, it is appropriate for use in stable contracts. The platform refers to stable contracts as those denominated in a crypto asset with predictable value.

For example: Let’s assume two parties agree to execute a work agreement that will see the transfer of 1 bitcoin (BTC) at the end of a project in two weeks. Because the supply of BTC is inelastic, the market value will be more volatile than the AMPL crypto asset. If the price of BTC is higher when the transaction occurs, one party will overpay, and if the price goes down, the other party will receive less compensation. As such, entering this kind of contract is risky for both sides. AMPL eliminates this risk by maintaining a more constant value.

Ampleforth vs. Stablecoins

Despite the assertion that AMPL functions as a stablecoin, some may question how the crypto asset is different from BTC and other fixed-supply assets if their wallet holdings fluctuate. Others might also question why AMPL is a more desirable asset than alternative stablecoins like DAI, GUSD, or PAXG. In short, the answer relates to the ethos of decentralization and the desire to create a financial ecosystem that remains beyond the reach of political influence and reliance on government-backed fiat currency.

Fiat and commodity-backed stablecoins remain reliant on traditional banks. Simultaneously, debt-marketplace-derived stablecoins aren’t sustainable in a free market scenario that relies on periodic bailouts. Ampleforth asserts itself as an independent financial primitive that operates without the need for centralized collateral or lenders of last resort, which is suitable for use in contract applications due to its inherent stability.

Ampleforth Use Cases

The Ampleforth protocol occupies a unique niche in the crypto ecosystem, one that may very well grow significantly in time. Because the AMPL token is less correlated to the price of crypto assets like BTC and ether (ETH), investors can use it to diversify or hedge cryptocurrency portfolios. Further, the AMPL token is an efficient, stable form of collateral for use in decentralized finance (DeFi) protocols. However, the project team’s primary objective is to establish the Ampleforth protocol as an alternative to fiat-denominated finance.

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To accelerate adoption, the Ampleforth crypto protocol incentivizes on-chain liquidity through its Geyser program. The Geyser initiative caters to Uniswap AMPL/ETH liquidity providers (LPs), allowing them to stake their LP tokens on Geyser to receive additional AMPL tokens. As the DeFi ecosystem expands, protocols like Ampleforth may generate growing interest. The elastic, non-dilutive nature of the Ampleforth protocol makes it unique within the stablecoin ecosystem as an option that is less reliant on the legacy financial systems on which crypto and blockchain aim to improve.

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