How Ampleforth Is Redefining Money
One of my American friends told me some years back that the US was amidst an obesity pandemic. I googled that time to learn that the rising obesity in the country was indeed a public health crisis. Why did people eat so much there? We eat when we are hungry or we eat to prevent hunger. It may be possible that people are ill-informed about their diet requirement and jumping onto high calory foods. The reason can also be a lack of self-discipline. Two University of Miami marketing experts came up with a provocative idea about why Americans made poor food choices. In their research paper, they tried to establish that the people’s food choices were influenced by their perception that they lived in a harsh environment. A harsh world made them fiercely competitive for scarce resources and they tried to live the present moment. It created an electronic immediacy to dismiss the future and obtain a diet rich with calories. Okay! This was a bit controversial and radical idea but it demonstrated a far-fetched effect of scarcity.
“The waste of plenty is the resource of scarcity.” - Thomas Love Peacock
Let’s think about scarcity
Scarcity is the foundation of the essential problem of economics. All resources are limited and our wants are unlimited. We need to allocate our resources efficiently to fulfil our basic needs, wants and additional wants. Money is a quintessentially scarce resource. I may feel that I have ‘enough’ money but I need to go through a cognitive process to define what is enough for me. Problem is that when I feel I have enough money, I start to live an abundant life along with time, which is also a scarce resource. As time flows, I may obtain a scarcity mindset and feel I don’t have enough money.
A bit of the history of money
Fiat money is a very recent phenomenon. We’ve used commodity money since ancient times. Gold, silver, copper, salt and many more things were used as the medium of the exchange earlier in the history of mankind. The key feature of commodity money was that the value was directly derived from its utility as goods. Gold was the widely accepted commodity money at every part of the world. When paper money came, it was based on a quantity of gold. Store-of-value is a property of money and gold was always the safe-haven asset. So, the monetary policy based on the gold standard was widely accepted. Paper money gave convenience of the transaction and it preserved store-of-value as it was fully backed by a hard asset. Alas! The gold standard is used nowhere nowadays. UK replaced the gold standard in 1931 and the US followed them in 1933. "We have gold because we can not trust governments," America’s 31st President Herbert Hoover famously said in 1933. Then a financial history was created. All Americans were forced to convert their hoarded gold to the US dollar at a government decided price. The US deserted remaining currency dependability on gold in 1973 and that was the death knell of the gold standard. Today’s fiat money is basically a government order to accept it as a medium of payment.
The third money
Fiat money lacks absolute scarcity as the central banks can print any number of notes. Quantitative Easing (QE) policy of FED basically is an oath to create an unlimited money supply. Unlimited money can act as a stimulus to the economy which is facing the wrath of a pandemic but it is not a sustainable practice. When the supply of money is increased, the store-of-value is not preserved and it leads to inflation. Satoshi Nakamoto’s distrust with the central banks and the present monetary system led him to create Bitcoin. Satoshi described it as peer-to-peer money with a fixed supply of 21 million units and programmed its inflation. Bitcoin, once considered a radical ‘punt’, has found mainstream economy adoption nowadays and emerged as the best performing asset class of the last decade. Bitcoin can be considered as a synthetic commodity, the third type of money. Bitcoin is absolutely scarce and it is storing value significantly well. Surpassing the cult asset gold in the value pyramid is extremely difficult but Bitcoin has done it to create the modern era gold standard. The success of Bitcoin also created an ecosystem comprising of numerous cryptocurrencies. So far, so good. But let us remember the price volatility of Bitcoin and any other cryptocurrency. It is really difficult to use cryptocurrency as a medium of payment due to price volatility. Stablecoins can be a solution to this but the conventional stablecoins are again backed by fiat money. If fiat money does not preserve store-of-value, how can the stablecoins do?
The quest for a new money
Diversifying the portfolio with cryptocurrencies also exposes an investor towards owning an asset class extremely non-correlated with the traditional asset class. Again, today’s cryptocurrencies are quite correlated with each other. The price movement of the altcoins is quite dependent on Bitcoin’s price. We also know that the cryptocurrency market is still at a nascent stage and the effect of the macro-economic factors on the market is not very clear. Is there a way to shift from the price-based trading strategy for a synthetic asset like cryptocurrency? What if we focus on the supply side for price discovery? Or can we target a benchmark price and shift the game towards the supply side? Synthetic assets are meant for experiments. What’s the harm in creating a supply-side experiment to establish store-of-value for an asset?
AMPL - Not your typical stablecoin
Ampleforth aims to redefine money. It is not a stablecoin as it does not eliminate volatility. Elimination of volatility does not guarantee the establishment of store-of-value. The Ampleforth protocol is based on an elastic supply which is dependent on demand. The maximum supply of AMPL is 395,345,190 but the circulating supply expands and contracts based on market demand. AMPL is designed to track 2019 USD price and that is its price target. If AMPL price goes above $1, the algorithm increases supply. If the price goes below $1, the supply gets reduced. This is called the ‘rebase’ mechanism and this rebase happens daily to meet the price target. Sounds complicated? Let us remember the basic supply-demand law of economics. When supply increases, demand decreases and vice versa. When AMPL price stays above the target price, the demand increases as the investors get allured by the price appreciation. The supply increase tackles the increase in demand as the increased supply creates selling pressure on the token and price gets reduced through trading activity. Now imagine the opposite scenario. When AMPL price is below $1, the supply gets decreased and it creates scarcity in the market. As an effect of scarcity, the demand increases and results in the price appreciation of the token. If you hold AMPL in any exchange or your private wallet, it is expected that the daily rebase mechanism will auto adjust your token amount. Don’t get astonished. This is a new generation elastic money! The rebase mechanism is based on the average daily price of AMPL and the historical data is available here.
AMPL in DeFi
AMPL was launched in 2019 and it really went through a dynamic price curve since its launch. The elastic supply was really surprising for the investors and so expansion-contraction was regular. The equilibrium can happen when people understand it properly and respond after understanding the protocol. AMPL is not correlated to other digital assets. Yes, it is experimental in nature but encourages the investors who are looking for a new kind digital asset. The users of AMPL only can create equilibrium in the network. A system like this can produce a reliable medium of exchange over a long time period. AMPL is suitable for use of billions of people due to its expandable supply. In case, there are not enough users, the supply gets contracted to suit the need of a group of people. Today, we talk about building a digital economy and decentralized finance or DeFi. Lending and borrowing activity without the intervention of any third party is a path-breaking concept of DeFi but again the price volatility of the crypto assets makes them very unsuitable for lending or borrowing. Stablecoins come into the picture here but the normal stablecoins (USDT, USDC etc.) are centralized and the asset backing is always debatable. DAI solves some of the problems as it is decentralized stablecoin backed by the crypto collaterals but price crash of the collaterals can lead to the liquidation of the vault easily. During the market carnage of Crypto Black Thursday, numerous DeFi vaults were liquidated and caused a bloodbath in the market. AMPL can be ideal DeFi collateral due to its price stability mechanism. Imagine borrowing $10,000 with AMPL collateral and repaying after 5 years. As AMPL maintains its price target, it seems to be damn easy and hassle-free.
The reason for the removal of ‘gold standard’ in the monetary policy was linked to the industrialization of that time. Due to its scarce supply rate, gold was unable to support the high growth pace. So, gold was separated from the monetary policy by the governments. With that, the governments obtained indefinite power to inflate the money supply and support the growth of the economy but it also established a totalitarian control over the money supply. Bitcoin solves a lot of problems but it creates another ‘gold standard’ due to its fixed supply. A gold standard is really very strong ideologically but not capable to handle sudden shock or surge of demand. AMPL combines fiat money’s flexibility with transparency and decentralization of Bitcoin. Although it is an ERC20 token now, the project wants to expand to other blockchains also for mass adoption. Only time can tell the success story of AMPL but no other asset can offset the changes in demand and AMPL is absolutely unique in translating price volatility to supply volatility and countering systematic risk.