If you didn’t already know, different algorithm stablecoins actually vary in design. Ampleforth, the oldest algorithmic project, is trying to change the meaning of “algorithmic stabilisers.” Its token, THE AMPL, introduced an elaborate “Rebase” mechanism that increased the supply of tokens when the price of contemporary coins rose above a certain threshold. But for a more fundamental purpose, AMPL is not a true stablecoin, despite its explicit price target.

Relying on this simple algorithm, AMPL’s market value grew rapidly, reaching nearly $700 million at one point. In the process, Ampleforth joined external DeFis such as Aave to expand the pool of liquidity and lending. Whether AMPL becomes a top-tier DeFi collateralised asset is critical to its future. The introduction of variable rate models and native cross-chain bridge solutions is expected to further drive the AMPL application space.

Algorithmic stablecoins: A slow consensus-building journey

Elastic provisioning AMPL is actually more difficult than other types of algorithmic stablecoins for rapid deployment to other applications on a scale. Although Ampleforth is not averse to volatility by design, it adapts the supply curve to meet volatile market conditions. Every day at 2am UTC, the AMPL supply changes according to the “Rebase” mechanism. If the price is too high, everyone with AMPL will get more. Ideally, AMPL’s adoption scenario and circulation will grow substantially while maintaining some degree of benchmark pricing.

The dollar standard narrative under inflation

The crypto market has been falling apart this year and unfortunately, we’ve been caught up in a wave of interest rate hikes rarely seen in history. Consumer price inflation was on the rise, and the Fed went ahead and raised its benchmark interest rate by 75 basis points. In Europe, bond yields have continued to rise. US bond yields are also rising, the US stock market continues to decline. When the economy as a whole is facing severe liquidity reduction, people are often in the dilemma of “choose to suppress inflation” or “choose to continue to rescue the economy”.

At a time when treasuries, that all-important collateral, are experiencing unprecedented volatility, margin calls will be everywhere. The risks of algorithmic stablecoins are particularly obvious because of their inability to suppress volatility. This effectively forces us to rethink the value of the dollar. Ampleforth redefined the way people thought about the value of the dollar.

Ampleforth is not actually going to bind dollars. Instead, its target is the value of the dollar in 2019. The fundamental purpose of this design is to act as a hedge against inflation and as a unit of account. As high inflation persists, people will see the real value of dollar-denominated credit fall. The search for a new unit of account will restore confidence in credit markets after debt loses value.

A stable unit of account, not a stable dollar

The dollar continued to overshoot as the day wore on. The AMPL target price takes this inflation into account. Ampleforth helps to find a balanced expression of real value and real price under people’s real life conditions by tracking book value consistent with dollar prices in 2019, effectively increasing prices and capturing the value of time.

From the above analysis, AMPL is more like a time currency. Time is fluid and volatile. In other words, $AMPL is tied to time — the ultimate unit of account. AMPL has been around for a long time now, but it’s still a long way from mass adoption. But the results so far are promising. The community has held up fairly well in this round of crypto clearing and has been very active in the governance module.

Ampleforth will soon release a decentralized derivative called SPOT, which should be less volatile. SPOT is a perpetual note backed by fully collateralised AMPL derivatives. SPOT is not tied to any specific value object. Its price may fluctuate in a range similar to that of the AMPL. This decentralized derivative, separated from AMPL’s volatility in supply, can be supplemented as a refuge from inflation.

Simple and pure algorithmic philosophy

AMPL effectively captures the value of time because its target price never depreciates. Thus, if time is money, AMPL is the ultimate time currency. Ampleforth published an evolved rebasing model to further strengthen the linear derivative model of the protocol by introducing Sigmoid rebasing functions.

Trade price fluctuations for supply fluctuations

Ampleforth evolved a rebasing model designed to optimise supply. History suggests that extreme market conditions can have a dramatic impact on AMPL supply, which requires a long supply correction. Sigmoid curve can be used to achieve a more durable prediction model, which greatly improves the accuracy of market behaviour prediction.

Since June, AMPL has mostly traded below $1, occasionally trading above the peg. At the time of writing, the AMPL supply remained around 37M. At the heart of the Ampleforth ecosystem is a game of coordination between all its participants and an elastic supply curve. As the network matures and attracts more users, Ampleforth will become a more regular system.

The reason AMPL has survived so far is its concise algorithmic logic. Its value comes from its regular supply curve, not from collateral or anything else. Frankly, algorithmic stablecoins are not as secure as collateralised stablecoins. But the rebasing model naturally exposes the confidence and risk of the network. This also required Ampleforth’s resilience to extreme market conditions.

In the past, AMPL has been prone to cyclical boom and bust cycles. This is not a bad thing, as the entire crypto market runs this trajectory. However, the Ampleforth community had to think ahead and create a reserve insurance fund to ensure that no Terra-like catastrophic losses would occur in the event of a flash crash.

The rebalancing mechanism of balance of supply and demand

AMPL’s Rebase mechanism is increasing the utility of AMPL, thereby expanding asset coverage and revenue generation. More recently, they have introduced an elastic vault mechanism, powered by AMPL’s rebasing mechanism. Flexible vault ensures that individuals can deposit AMPL into the vault to receive rewards in the form of new revenue tokens. A resilient vault can monitor the AMPL’s rebasing state and reward mortgagees with tokens when the AMPL is at a loaded base or equilibrium (neutral rebasing).

Of course, when the market is positively rebased, the percentage of additional AMPL supply will be traded as EEFI. Ninety percent of the EEFI purchased by the Treasury was burned, and the rest of the tokens were deposited into the DAO’s Treasury. Such a mechanism makes EEFI a deflationary asset. Through this two-way adjustment mechanism, the resilient vault introduces new economic incentives for AMPL market participants.

User interaction with algorithmic stablecoin protocols is often complex. As adoption increases, Ampleforth’s response to the increasing number of participants who panic sell and avoid a death spiral becomes more urgent.

Terra’s failure is telling enough

Elastic supply and rebasing models are now building confidence in the market. How do you ensure that governance tokens are held by the right people? This is a problem that many algorithm stablecoins don’t think about. Traditional finance is inherently unequal. The stronger the currency, the more vulnerable it is to capital groups.

It is therefore important to foster a decentralized user community in the early stages of a protocol. If algorithmic stablecoins are to be sustained over the long term, a highly communicative community mechanism is necessary.

Terra’s failure is telling enough. If most participants agree on a price point, a proposal can save a financial catastrophe. Hopefully, the Ampleforth community launched FORTH DAO, a decentralized autonomous organisation. The FORTH DAO is responsible for managing the Ampleforth protocol, including the vault assets used to support the continued growth and development of applications and ecosystems.

Real changes in the world’s wealth can only result from changes in demand. It is clear that the Team at Ampleforth understands this principle, as they focus on finding sources of demand for stablecoin expansion from both internal crypto space and external real-world finance.

With the introduction of a new governance framework and a new base model, Ampleforth is likely to continue the trend of more resilient DeFi applications in the foreseeable future. However, there is still a need to guard against massive AMPL sprawl, and we also need to question the need for real applications of other algorithmic stablecoins.

By Kyle, Investment Manager@Bing Ventures