If you've never heard of Ampleforth, or if you have heard of Ampleforth but you're confused with why it exists and how it's different from other cryptocurrencies, then this article is for you. Ampleforth is an attempt by cryptocurrency developers to create an “Ideal Money” that overcomes not just the limitations of fiat currency, but many of the limitations of existing cryptocurrencies as well. In this article, I will explain what makes AMPL unique, how it works, and how it offers a solution to both the “Bitcoin Problem” and the “Tether Problem”.
It Seemed Odd At First
Ampleforth is a stablecoin that is designed to track the price of the 2019 US Dollar. I realize that there are countless stable coins that all attempt to fulfill this goal, so Ampleforth is not really unique in that respect. Rather, Ampleforth is unique in that it employs a unique counter-cyclical inflation/deflation policy that automatically increases or decreases the amount of AMPL tokens in a user's wallet with the goal of maintaining price stability.
I will be completely honest. The first time I read that and saw that the number of tokens in my wallet was going to change everyday I thought “who would want to hold a cryptocurrency that can be deposited or taken away from your wallet at will.” However, this changed when I saw that Ampleforth was being incorporated as a tipping token on Publish0x. Publish0x is without a doubt one of the leading cryptocurrency websites, so I figured that if the team was willing to support and encourage the use of the Ampleforth token, it was at least worth a more detailed look and not just a cursory glance.
Ampleforth's Daily Rebasing
After conducting a more detailed analysis, I see that the daily “rebasing” that changes the balance of Ampleforth tokens in a user's wallet is actually a very innovative solution to a very pressing problem. The so-called “supply smoothing” that Ampleforth introduces is designed to create a form of money with both scarcity and also a manageable supply - let me explain why that matters.
The best way to explain why Ampleforth is unique is to compare and contrast it to cryptocurrencies like Bitcoin to fiat currency. It's well known in cryptocurrency circles that Bitcoin is prized for its algorithmic supply that is resistant to inflation, decentralized, and outside the hands of any national government. However, the very things that make Bitcoin unique and different (and better) from fiat currency in the long run also cause problems for day to day usage.
The "Bitcoin Problem"
Although Bitcoin can retain and store value independent of a government spelled monetary policies, it is this very same quality that hinders its ability to be used in day-to-day transactions. For example, let's suppose that I buy one Bitcoin today for around $19,000. Today, that 1 BTC is worth a small, budget level car. Let's suppose that several years from now, the price of that Bitcoin is now $100,000 and worth the price of a house. Although it is true that your purchasing power has been retained, and in fact increased, the relationship between a unit of Bitcoin and the products and services that it can purchase is constantly fluctuating. This limits Bitcoin’s ability to be used as a “unit of account”, and is one of the key ways that AMPL seeks to deliver a more “Ideal Money” than Bitcoin or other existing cryptos.
The "Tether Problem"
To solve this “unit of account” problem and maintain a stable relationship between products and services and the amount of cryptocurrency required to purchase them, many projects have created various stablecoins. Strictly with regards to maintaining short-term price stability, stable coins do offer an improvement over cryptocurrencies like Bitcoin. So long as a stablecoin implements a proper peg, it is essentially the same as cash with regards to maintaining price stability…..which is a benefit in the near term, but horrific in the long term.
Remember that one of the main reasons cryptocurrencies were invented was to give people a method of protecting themselves from failed government monetary policies. Thus, the price of appreciation of traditional cryptocurrencies such as Bitcoin is a necessary function for preserving long-term purchasing power that stablecoins don't possess. Because existing stablecoins are pegged to fiat currency, ability/inability to protect purchasing power is the exact same as the fiat currency to which they are pegged.
Although stablecoins offer increased convenience for day-to-day transactions, they are no better than fiat currency for protecting long-term purchasing power. At the same time, Bitcoin and other existing cryptocurrencies that are provably scarce and have a limited supply are better at protecting long-term purchasing power but inefficient for day to day transactions and do not fit the definition of ideal money simply due to the fact that they cannot serve as a unit of account.
As a remedy to both of these competing priorities, Ampleforth introduces a cryptocurrency whose value is determined by a combination of price and supply. As the price of AMPL increases (perhaps to increased demand from fiat inflation) the outstanding supply of AMPL increases thus “de-valuing” each individual AMPL. At the same time as each individual AMPL is decreasing in value, the algorithm adds more AMPL to each user's wallet. This system attempts to preserve the total amount of value in each user's wallet while also preserving the ratio between a single AMPL and the amount of goods and services it can buy.
One of my favorite parts about AMPL is that “The currency is game-theoretic and non-collateralized, making Ampleforth globally scalable—and its price-target can be adjusted to any purchasing power index, making it government-independent.” In other words, should the USD lose purchasing power, AMPL has the ability to be re-wired and maintain stability with some other index which makes it a huge improvement over stablecoins that are tied to a single asset, usually USD.
I know that many users, myself included, may be slightly nervous about this fluctuating supply, so I'd like to clear up a few potential issues. First, the inflation or deflation of the Ampleforth supply is controlled by an algorithm, which still makes it much more predictable, fair, and impartial than the arbitrary nature of central bank inflation.
Second, although the total number of AMPL tokens may increase or decrease depending on market pressures the total share that is attributed to each user remains the same. So, if I have 1% of the total supply on 11-28-2020 and the supply inflates 2% on 11-29-2020 I will still have 1% of the total supply. To use the official terminology, a user's share is not diluted by the inflation/deflation.
In my opinion, the price stability delivered by Ampleforth is one of its main selling points, but there are some additional considerations that I think are worth pointing out. Ampleforth’s unique rebasing system is billed as a way of adding diversification to a cryptocurrency portfolio. According to Ampleforth, the vast majority of cryptocurrencies are “dangerously correlated” which means that if one cryptocurrency goes up, the rest go up, and if one goes down, the others go down. Ampleforth hopes that their unique method will allow AMPL decouple from the price of Bitcoin, and other cryptos, and add diversity thus reducing overall risk in a cryptocurrency portfolio.
Those of you who may have read my previous articles know that I have pointed out stablecoins are critical to the mass adoption of crypto but are also inherently “un-stable” due to their underlying fiat peg. Thus, I think a cryptocurrency that could address both of these issues is greatly needed but will also do very well.
As with all of my articles, nothing here is financial advice and simply represents my thoughts on the matter. That being said, I'm incredibly excited about Ampleforth, it's a unique approach, and I look forward to earning/giving AMPL tips on Publish0x .
NOTE - it is unclear what the tax implications of AMPL’s rebasing strategy will be at least for US holders. Traditional stablecoins that maintain price stability mean that there is no taxable event. Even appreciating cryptos like BTC don't trigger a taxable event if they are simply held and not sold/traded.
However, a stablecoin that maintains stability through deposits and withdrawals of additional units of currency could possibly be treated as income/property/sales with each rebalancing being viewed as an acquisition/disposition of property. I'm not a tax expert, but this is definitely something to consider or consult with your tax professional about.