So this changes the dynamics of Uniswap how?
To set the scene...
- We have Ethereum, chomping away, being the best damn smart contracting platform that can be.
- It's got a native token ETH, the most liquid and trustless asset on its network.
- On Ethereum, we have Uniswap, being the most gas efficient trustless marketplace the world has ever seen.
- Also on Ethereum, we have Ampleforth something a little different.
Ampleforth is a modified ERC20 which alters the implementation of Mint/Burn with Supply Smoothing, in an event known as Rebase. This mechanism adjusts the supply proportionally across all holders to trend towards a target price per AMPL (2019 US Dollar @$1.009).
Supply smoothing is a mechanism that really shines when it's put to work. Holding AMPL is just exposure to its market cap no matter the Rebase. You own 1% of the supply today, you will own 1% of the supply however many days from now guaranteed if you do nothing but hold.
But what if you don't do nothing?
I assume you know Ethereum, but Uniswap...
Well Uniswap is pretty freaking cool and worth checking out. It's an Automated Market Maker, which is just a fancy way of saying it trades between two assets at whatever price it wants, and that price is set automatically by some math. In Uniswaps case, the only thing it cares about is the ratio of the assets being traded against each other. Users who lock funds into Uniswap for use in Market Making are known as Liquidity Providers. Every trade on Uniswap pays a fee which is split between these Liquidity Providers proportionally.
x = Quantity of Token X y = Quantity of Token Y z = Constant Product #(does not change unless supply added/removed) x * y = z
This formula plots the price on whats known as a Bonding Curve shown below:
As a strategy, Uniswap is typically optimized for gains if the price ratio returns to the price ratio you entered the position at. If the ratio changes, you face what is referred to as Impermanent Loss. For most assets this means the Market Cap ratio returns to the same Market Cap ratio you entered the position at. For Amples; not so much.
What is Impermanent Loss Really?
When you are in a 50:50 AMM basket impermanent loss is derived from the strategy selling the rising priced asset for the paired asset. This gives you less exposure to those gains. You are earning fees, but in the opposing currency. You would then need the price of the rising asset to return, or for the opposing asset to catch up in gains to rectify the ratio and return you to your original exposure.
- Say you have assets X and Y.
- You enter at ratio 1:300 with 1 X = 300 Y
- Say Y price doubles.
- The pool ratio is 1:150 with 1X = 150 Y
- You now have half as much exposure to Y as you did before Y doubled in price.
Ample + Uniswap
A more complicated value proposition
Ample is able to grow in market cap while keeping its price tethered toward $1. Every time a Rebase occurs, the Amples in the pool are affected by it (all Amples are rebased). This causes the Uniswap pool to reprice based on the new ratio of assets instantly. Rebase changes are treated as fees to liquidity providers by the pool.
Uniswap prices along a curve. When a new Liquidity Provider enters the pool, they add funds at a ratio which maintains the current price. This also moves the center of the curve towards the current price ratio, and is a part of the mechanisms which keep Uniswap priced in line with external markets.
A Rebase adds more AMPL to the pool but the paired asset remains untouched. This acts different than typically adding liquidity. It alters the price since the asset ratio is altered, and moves center of the curve less drastically towards current ratio.
Modeling Adding Liquidity vs Rebase
In the case of a positive Rebase, paired with a more valuable asset (ETH), the center of the curve has an increased valuation for AMPL. Meaning the gravity of the curve pushes AMPL to a higher price, even without more liquidity providers stepping in, though less powerfully then if they did. This suggests that if the Uniswap pool is perfectly balanced at the time of Rebase, there is a an opening where the price is pulled towards the previous price until liquidity provides rebalance. I don't fully understand the consequences of this, but I think it's novel and worth attention.
Still one more piece that really drives this whole thing home.
The Geyser is here to incentivize the way
The geyser really spikes off this run on June 23. It creates an incentive for users to deposit Amples into Uniswap, and creates demand, even if its just to take advantage of yield farming. The geyser rewards Liquidity Providers with Amples if the LP tokens are staked in it.
Rewards are distributed by a drip from a rewards pool among users proportionally. However distributions are also affected by a multiplier which increases based on the amount of time the funds have been locked from 1x to 3x over 60 days.
This multiplier is calculated per deposit. Positive Rebases extend the length of the program while negative Rebases reduce the length of the program, since they affect the pool's funds.
Ample Holdings: Central Exchanges (CEX) Versus DEX Traders
In the above chart we can see that since the geyser launched there has been a massive shift of funds from Exchanges to DEX Traders.
Amples on Exchanges last 60 days
In the above chart we can see that once the geyser started Uniswap (blue) liquidity takes a bump and raises the total amount Ample on exchanges. Once Uniswap has sufficient liquidity, there begins to be an arbitrage opportunity between Uniswap's efficient repricing and CEX order books that drains Amples from CEX holders into DEX trader hands. Since Uniswap only holds funds for one half of the traders, the reduction in total Amples on exchanges can be viewed as Amples that are now in DEX traders hands, unbound to an exchange.
I find it neat that the initial drop in liquidity was stabilized showing that traders may have learned to adapt to the Rebase. I'm unsure the day that Kucoin (Yellow) began freezing around Rebases, but its notable that it almost got squeezed out, but then grew to be the dominant Order Book liquidity source against Bitfinex (Green).
How does this affect my Ample + Uniswap investment strategy?
Pairing a stable asset with a stable asset means very little impermanent loss unless once side collapses.
Pairing a stable asset with a volatile asset is a very strong bet in stability because there is only one price of the volatile asset that minimizes impermanent loss.
Pairing a volatile asset with a volatile asset is a bet in even price ratio, but gives more opportunities to collide with the originating price ratio if they both grow at a similar rate.
Pairing an elastic asset like AMPL with a volatile asset like ETH gives a lot of flexibility in exits. Amples trend towards a price of 1 no matter their market cap, giving them a tight band of price changes, but ample opportunities for collisions of the originating price ratio. If ETH 2Xs its price, AMPL must get to $2 if you invested at $1. This gives flexibility to bet on Ample's MC rising at a different rate than Ether's, while still returning to the same ratio.
For every strategy below, depositing the resulting LP tokens in the Ample Geyser will result in additional rewards, and while adding another layer of smart contract risk, I do think it's worth it for all AMPL:ETH Uniswap positions. As of today, there are 68 days left of the geyser's Beehive initiative.
Low Ample Price Long ETH
Entering the Liquidity Pool at a low price per AMPL is a desire for greater ETH exposure. While entering at a 50/50 asset ratio you know the AMPL price will return to $1 and will push the ratio in favor of ETH. This means that if ETH rises, you can count on getting out at the initial ratio you put in with AMPL. This also means that while waiting for ETH to rise, you have reduced exposure to all Rebases, as you can expect AMPL to return to 1. If negative Rebases continue at a price higher than your entry, you will be shielded from some of the impact. The lower the entry price, the greater the resistance to negative and positive Rebases.
This strategy believes ETH will grow in value at a greater rate than AMPL, and hedges against negative Rebases at a lower ratio than entry. It mostly targets on keeping exposure leaning ETH and fees accrued from Ample's volatility.
- You enter at ratio 1 ETH : 800 AMPL
- AMPL = $0.50
- ETH = $400
- AMPL price rises to $0.75 while ETH is unchanged.
- The ratio is about 1:533.
- There is Negative Rebase but since your holdings are relatively more ETH, you are less affected.
- ETH doubles in price while AMPL returns to $1 (1 ETH = $800)
- The ratio is 1:800
- You can exit with the same ratio of assets.
Demo Liquidity Provider Entering $0.50 per Ample
$1 Ample Price Long ETH
Entering the Liquidity Pool at an average price near $1 while Long ETH is a neutral strategy. While entering at a 50/50 ratio you have a good threshold of AMPL pumps to get AMPL to $2 giving you leeway for ETH to ~2x and still give you a chance to exit at the same ratio you entered.
If the ETH price stays near entry and ...
- the AMPL price rises, the ratio will lean ETH and you will have less exposure to positive Rebases.
- the AMPL price drops, the ratio will lean AMPL and you will have greater exposure to negative Rebases
If the ETH price rises and ...
- the AMPL price rises, the ratio may approach the entry ratio and you may be able to exit at similar proportions to entrance
- the AMPL price rises relatively less than ETH and you will have greater exposure to AMPL Rebase
- the AMPL price stays the same and no Rebase
- the AMPL price drops, even more exposure to negative Rebase
This strategy believes ETH will grow in value at a greater rate than AMPL, and but still wants reasonable exposure to positive rebases. It is long AMPL, but longer ETH. It seeks mostly to benefit of volatility.
Demo Liquidity Provider Entering $1 per Ample
High Ample Price, Long ETH
Entering the Liquidity Pool at a relatively high AMPL price is a strategy that Longs Ample over ETH. The ratio returning to 1 and ETH price rises will both push the ratio to lean to a greater amount of AMPL. This gives the holder greater Rebase exposure for all Rebases at a higher ratio then entrance.
There is a far lower chance of exiting at the same price ratio in the medium term, and more bets that the exit will be leaning greater towards AMPL than their entrance. This position is betting the positive AMPL Rebases will be more significant than the ETH gains.
Demo Liquidity Provider Entering $2 per Ample