While exploring the cryptoverse I recently stumbled upon this pretty old (in crypto terms) thread on Aave which sparked a snowball of thoughts that I just had to share in this piece.
The above thread is a proposal for Aave to support $AMPL as a collateral asset and currency. It dives into the unique nature of $AMPL and how it can create an active and vibrant market, bringing new and interesting possibilities to Aave users.
I unpack a lot of alpha here, so get comfortable, grab a drink and let’s dive in.
$AMPL Advantages over $DAI & $USDT
When it comes to stablecoins, both $DAI and $USDT are the most used ones across the DeFi space. However, both of them bear risks.
Let’s unpack those risks:
$DAI: A decentralized multi-collateral crypto-backed stablecoin is an ideal stablecoin for those in favor of decentralization and the ethos of crypto.
However, unfortunately for $DAI, it’s prone to black swans like the one it experienced in March 2020:
On March 12, 2020, the price of $ETH dropped to double digits and left $2 - $4.5 million worth of $DAI undercollateralized. This led to many users losing great sums of money due to their Collateralized Debt Positions (CDPs) being liquidated.
On top of that, $DAI is now collateralized by other cryptoassets and therefore relies on their prices to not crash severely in short amounts of time. This also causes it to be exposed to greater USD price fluctuations compared to centralized stablecoins.
Yet another con for $DAI, it’s only listed on a few major exchanges and doesn’t have near the liquidity as other stablecoins such as $USDT and $USDC.
$USDT: The largest, most liquid stablecoin that claims to be 100% backed by traditional currencies and cash equivalents held in its reserves.
However, $USDT is a centralized stablecoin, and its reserves have not been audited or verified to ensure 100% backing of $USDT with fiat currencies and cash equivalents. Therefore, people simply trust that $USDT is 100% backed while there is no definitive truth to this.
Additionally, iFinex, the company behind $USDT is undergoing multiple lawsuits and investigations regarding market manipulation, money laundering, and the collateralization of $USDT.
$AMPL: An adaptive digital currency with an elastic supply based on market conditions and sound economics.
Now you might ask:
“How can $AMPL put other stablecoins out of business if it's not stable on its own?”
Indeed, $AMPL is not a stablecoin but its protocol continues to tighten its equilibrium around $1 despite not having any asset backing it!
Don't believe me? Check out the math at the bottom of this article:
In short, brawnd0 calculated that the average price for $AMPL derived from the closing price of its entire history is $1.021!
“Pretty damn stable for a not-so-stable stablecoin, right?”
$AMPL Lending & Borrowing Can Be Sexy
Although it might not look like it on the surface. Let's compare it in a 5-year time frame scenario against $BTC and $USDT.
$BTC: Say you borrow today $50,000 in $BTC for a new car on Aave. In 5 years, with Bitcoin hitting 6 digit valuation, you will find it hard to repay the loan and get your initial deposit back. This scenario is great for lenders, but not borrowers.
$USDT: Say you lend today $50,000 in $USDT. The ongoing inflation, especially at today’s pace, can strongly reduce the purchasing power of the dollar. This scenario would be great for borrowers, but not lenders.
As you can see, both fixed and infinite assets bear risks for one side of the table.
How $AMPL Fixed this?
$AMPL is a decentralized cryptocurrency like $BTC and $DAI, but it differs by having an elastic supply (a forever increasing/decreasing supply) that’s based on sound economics of supply and demand.
$AMPL automatically and proportionally adjusts its supply across all wallets on a daily basis through the rebase mechanism.
In doing this, AMPL’s elastic supply serves as the simplest direct solution to the supply inelasticity problem and can be reliably used to denominate complex contracts for lending and borrowing.
Now let’s apply $AMPL to the $BTC and $USDT lending and borrowing scenarios described above:
$AMPL: Say you borrow today $50,000 in $AMPL for a new car on Aave. In 5 years, there’s a fair degree of certainty that you will be able to purchase again $50,000 in AMPL for around the same price. It will be easy to repay the loan and get your initial deposit back.
$AMPL: Say you lend today $50,000 in $AMPL. Since $AMPL’s price target is inflation-adjusted and the protocol is designed to always seek the equilibrium price target over time, it makes for an excellent collateral asset and currency for both borrowers and lenders.
What Else Makes $AMPL Attractive for Aave Users (and Beyond)
Not only does $AMPL’s inflation-adjusted protocol design make it an excellent collateral asset, but it also has many other benefits as a collateralized asset for borrowing and lending on Aasve and beyond, such as:
- It’s resistant to supply shocks because its increased or decreased demand will be absorbed by the supply. The daily $AMPL rebase keeps the system in check.
- $DAI's Black Thursday scenario isn’t possible with $AMPL, so there’s no risk of collateral liquidations.
- $AMPL managed to maintain its $1 2019 peg promise since its inception, despite not having collateral.
- $AMPL remains non-dilutive under any market conditions, treating all holders as equal during the rebase event.
Just like Bitcoins fixed supply was and still is misunderstood by many, $AMPL is pretty much fated for a similar path of misunderstanding since it’s also a pioneer, this time of the elastic supply asset class.
While it's still so early and $AMPL’s price does swing, it opens a great opportunity for those who understand and can capitalize on it. That said, I think it's a matter of when, not if, $AMPL will be supported by Aave.
It just makes sense.
It would be mutually beneficial as Aave would strengthen the deep liquidity of $AMPL to become an even safer asset to borrow and lend via its platform – from small players to institutional size over time.
$AMPL on Aave is a win for ‘almost’ everyone as once $DAI/$USDT lenders and borrowers realize the potential of $AMPL, they will shift to it. When this happens, the importance of other stablecoins, especially centralized stablecoins like $USDT or $USDC, will decline.
Also, a small tidbit to end things off, the Chainlink team has put Ampleforth very high in the hierarchy of its hundreds of partnerships. It sits right next to Google on Chainlink’s homepage in the section of “Industry Leading Teams”. I wouldn't call it a coincidence.
Cheers guys! Catch ya in the next one.