Sirwin
Sirwin

What makes Ampleforth (AMPL) different?

By Nams | cryptohowto | 2 Jan 2021


To understand what makes AMPL unique, we need to start with some basic lessons in Economics. Additionally, we’ll explore what is wrong with Bitcoin and most altcoins, and how AMPL seeks to solve those problems.

Lesson 1: The law of supply

There is a direct relationship between the quantity supplied and the price of a commodity. In economics, the law of supply states that as the price of a commodity increases, the quantity supplied will also increase, and vice versa.

Price goes up, so does quantity supplied

The example in the graph above depicts a supply curve for coffee. It shows that if the price of coffee increases from $1 to $3, the supplier will increase the quantity supplied from 6 cups to 12 cups of coffee. This is basically common sense; the goal of the supplier is to maximize their revenue, so if the price of the commodity goes up, the person supplying that commodity will want to supply more so that they can maximize their profits. Likewise, if the price goes lower, they will reduce supply of that commodity so that they minimize their losses. In this case, the quantity supplied is able to respond to price in the market. Fiat money works in the same way.

Government, through the central bank, can reduce or increase the amount of money in the economy based on the price of money (interest rates), among many other factors. Thus, fiat money is made to respond to market conditions. However, the ability to increase the supply of dollars on the market brings forth the many problems you would most likely be aware of, most notably the problem of inflation. That is where commodities like gold and bitcoin are a safer bet than fiat. No one can increase the supply of gold or bitcoins because they are limited. There is only so much gold in the world, and only 21,000,000 bitcoins.

Herein lies the problem with having a finite supply of gold and bitcoins: they cannot adapt to economic shocks. Their limited supply makes them deflationary by nature (the opposite of inflation), that’s why the value keeps soaring upwards. AMPL solves this problem by having a flexible supply that responds to price, much like how a central bank would control the amount of dollars in circulation, but only better.

AMPL’s protocol is able to change the number of Amples (the unit of AMPL) in your wallet as a response to market conditions (changes in demand) so as to keep the price stable (at approximately $1). See the example below:

How price-supply equilibrium is achieved

Lesson 2: Supply elasticity

Building on the relationship between price and quantity supplied, a concept arises as to how quickly does a supplier change the quantity supplied as price of a commodity changes? Supply elasticity measures that speed. It is the percentage change in price per percentage change in quantity supplied. The graph below shows that if the gradient of the supply curve is steep, then supply is inelastic, meaning that there is very little change in quantity supplied as the price of the commodity changes. Bitcoin has a perfectly inelastic supply curve because we can only have 21,000,000 bitcoins no matter the increase in demand which may push prices up.

Supply elasticity

Per contra, AMPL has a near-perfect supply elasticity, much like fiat money. Perfect supply elasticity means that the supplier is willing to supply any quantity of the commodity at a given price. The AMPL protocol automatically adjusts supply in response to demand on a daily basis. The AMPL supply curve would look like this:

near-perfect supply elasticity

Consequently, either of the following two things will happen every 24 hours:

Number 1: the supply increases as shown below as a response to increased prices

supply increases to respond to increasing prices

Number 2: the supply reduces as shown below as a response to reduced prices

supply reduces to respond to reducing prices

The process of increasing or reducing supply happens every 24 hours. The result of this process is a stable price range and AMPL's ability to withstand economic/financial shocks.

As the protocol automatically adjusts supply, there is a window for short-term traders to take advantage of the opportunity to buy low and sell high. As shown in the example below, the price (p) will move in a stable range until point A when it could either go up or down depending on increased demand or reduced demand, respectively. If it goes up, sellers will enter the market to sell at a profit. If the price goes down, buyers will enter the market to buy cheap. As long as there are enough people willing to sell when price is high, it will eventually decrease. Similarly, as long as there are enough people willing to buy when the price is low, it will eventually start to rise. The result of the buying and selling activity will lead to a price correction back to the original price (point B). Therefore, a long-term holder of AMPL need not worry about short-term price changes during periods of price correction because price is fairly stable in the long run.

AMPL price correction behavior

Lesson 4: Volatility

This is the rate at which prices go up or down. In the market of cryptocurrencies, volatility is often associated with big swings in prices. “Pumping” and “dumping” are a common thing in crypto markets; markets can move 3X upwards or downwards in a space of 24 hours. However, AMPL brings a form of price stability never seen before in the cryptocurrencies. It combines the attributes of Bitcoin and fiat money, thereby making it very useful in denominating stable contracts.

Conclusion

Fiat money is not all bad. It possesses certain attributes that make it a suitable means of facilitating transactions. However, the inflationary nature of fiat makes it lose value with time. In addition, it is prone to several manipulations by governments who issue it. Thanks to Bitcoin and the power of blockchain for solving the shortcomings of fiat money. However, Bitcoin also possesses some properties such as its deflationary nature that make it unsuitable for use in facilitating transactions and contracts. This article has shown how AMPL combines the best of both worlds; bitcoin and fiat, to bring us a stable cryptocurrency that is suitable for use in stable contracts.

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Nams
Nams

Blogger. Cryptocurrency enthusiast. Economist. Researcher. Cryptocurrency is the future, and the future is now.


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