What's the Problem with $BTC, USD or $DAI that $AMPL solves?

What's the Problem with $BTC, USD or $DAI that $AMPL solves?

By Chenhuang_defi | CanUHodl | 29 Mar 2021


Bitcoin won’t become the standard for daily payments. Period. 

Don’t get me wrong, I love Bitcoin and believe it will remain as the number 1 cryptocurrency by market cap and succeed massively as the best treasury reserve asset/store of value. But the reality is, its fixed supply of 21 million BTC doesn’t work well for commerce because the volatility of demand translates into the price and only the price.

The only way to accommodate the increase in demand for a fixed supply asset, like Bitcoin, is for the price to go up. While that’s great for being a store of value, this can be problematic for commerce because constant price changes make it incredibly difficult to denominate things like services, contracts, or debt.

So, if fixed supply monies don’t work well as the standard for daily payments, what about infinite supply monies like the US Dollar?

The Problem with Infinite-Supply Money like Fiat Currency (USD)
The problem with infinite money supplies is that it leads to inflation. Period.

While we use fiat currencies like the USD for commerce and daily payments today, it doesn’t mean that it’s a perfect system. In fact, the US Dollar as we know it today has only been around for 50 years and is a giant experiment that’s failing. 

In 1971, the USD went off the gold standard and adopted a fractional reserve system which enabled the Federal Reserve to issue money as they please without any gold-backing. Ever since this change, the USD money supply has expanded rapidly and with it, inflation has skyrocketed:

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Source: wtfhappenedin1971.com

Basically, when you have an infinite supply of money and new money is being introduced into circulation, the purchasing power of everyone’s existing dollars goes down, hence why prices go up. It’s essentially theft or as some call it, a “hidden taxation”. And this is how our governments are devaluing our money.

And to be clear here, this is just one problem of inflation. To fully understand the negative effects of inflationary money on society, I recommend you take a deep dive into the graphs and metrics presented on wtfhappenedin1971.com. It will blow your mind. 

The Problem with Decentralized Stablecoins like $DAI

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$DAI token logo

MakerDAO’s decentralized stablecoin $DAI is a better alternative to fiat currencies or centralized stablecoins but still suffers from major issues such as black swan events.

Back in March 2020, when the markets suffered a massive crash due to fear and uncertainty surrounding covid, lockdowns, and the economy, the MakerDAO system for its stablecoin $DAI essentially broke down.

What happened was, MakerDAO Vaults with cryptocurrency backing the $DAI stablecoin require a minimum collateralization of 150% but when the price of Ether (ETH) and other cryptocurrencies dropped over 50% within 24 hrs, a very large number of Vaults got liquidated and the MakerDAO system failed to acquire the required collateral to back $DAI. 

While this unfortunate situation was since mitigated, it goes to show that $DAI is prone to price shocks like the black swan event that occurred in March 2020.

How $AMPL Solves Flaws of the Assets We know

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$AMPL comparison to $BTC, USD, and $DAI (Source)

Ampleforth addresses the shortcomings of fixed supply monies (Bitcoin), infinite supply monies (USD), and stablecoins dependent on collateral ($DAI) by creating an uncollateralized elastic supply cryptocurrency $AMPL, where its supply expands or contracts daily based on market conditions.

$AMPL Solves Flaws of $BTC
Since $AMPL is the first cryptocurrency with an elastic supply model and is pegged to something (the 2019 inflation-adjusted US Dollar, ~$1.027), I think Satoshi himself would be very impressed by it. 

After all, Satoshi did say:

“I don’t know a way for software to know the real-world value of things. If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that.”

12 years later, and we now have $AMPL – an algorithmic, decentralized, uncollateralized, and censorship-resistant cryptocurrency like Bitcoin, except it supports price stability by programmatically managing the money supply in response to demand, resulting in a better money.

I think Satoshi would be proud of $AMPL as its accomplishing the vision which he wished he could create but didn’t know how to do. 

$AMPL Solves Flaws of USD
Ampleforth has pioneered a revolutionary new monetary policy that emphasizes price stability with an elastic supply. 

It’s completely decentralized and programmatic with the total supply of $AMPL automatically expanding or contracting based on natural market conditions affecting $AMPL’s demand. With that, $AMPL’s price and stabilization are 100% sustained by free-market incentives. 

There’s no centralized entity like the Federal Reserve increasing the supply and inflating the currency. Instead, the Ampleforth protocol helps stabilize the price of $AMPL via its daily rebase mechanism that adjusts the supply up or down to restore $AMPL’s price equilibrium of around $1.02 (the 2019 inflation-adjusted US Dollar).

Now, before you start spewing that $AMPL is far from stable, that its price swings wildly between $0.70 and $1.50; let me remind you that $AMPL has been around for a mere 2 years. It’s nothing on the history of money timeline. 

$AMPL is meant to swing in its early stages of life. This is what brings people in and grows the network. It’s supposed to be used as a more speculative asset right now and thanks to the incentive mechanism that the rebase offers, it attracts more and more value over time.

Eventually, when $AMPL grows to a much larger market cap, the price of $AMPL will become more stable as a larger market cap leads to decreased volatility:

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Stability Over Time (Imagine the x-axis is a 20-year timeframe)

Oh and guess what? Despite its swings, $AMPL has managed to keep an average price of $1.024 as set by design since its inception. So yeah, on a macro scale, $AMPL is maintaining its stability just fine. 

$AMPL Solves Flaws of $DAI
First of all, $AMPL is not a stablecoin. 

The price of $AMPL isn’t pegged to any specific price or fiat currency. Rather the protocol seeks a price-supply equilibrium of around $1.02 by increasing or decreasing the supply of $AMPL.

Here’s how that works:

When the price of $AMPL is high (above equilibrium) the protocol increases the supply which incentivizes $AMPL token holders to take advantage of their increased supply coupled with a “higher” token price to take profits. 

This effectively restores equilibrium on the demand side once the change in supply goes through and helps the price per $AMPL to cycle around $1.00.

That said, the price is determined by the free market where arbitrageurs buy or sell $AMPL when it's considered to be overvalued or undervalued, and there is no collateral backing $AMPL.  Rather, it’s an independent financial primitive that does not rely on centralized collateral or lenders of last resort.

That’s how $AMPL fixes $DAI’s flaws.

$DAI relies on crypto collateral provided by stakers and cannot be sustained by free-market incentives alone, which is why it relies on periodic bailouts as seen with the black swan event in March 2020. 


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Chenhuang_defi

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