Ampleforth Explained

By RelyOnCrypto | | 4 Jun 2021

Ampleforth is a cryptocurrency with a unique feature: its supply is elastic and can fluctuate on a daily basis, yet AMPL token ownership is never diluted. Let me clarify what this implies in terms of money: having an elastic supply allows you to print new money or take money out of circulation based on demand. Fiat currencies, such as the US Dollar, are ideal examples of money with an elastic supply since the Federal Reserve may decide to print more if demand for it increases. Bitcoin is the exact opposite; its supply is fixed, and the only way to meet increasing demands is for the price to rise. Constant price changes can be difficult to deal with, especially when denominating services, contracts, or debt. Even though an elastic money supply might be beneficial in achieving price stability, it does have one drawback: dilution.

When the Federal Reserve prints additional money to increase the supply of Dollars, that money enters circulation, diluting everyone else's portion of the available supply of Dollars and thereby making them poorer. Ampleforth is a non-dilutive. This is accomplished by adjusting supply proportionally across everyone's accounts.

Consider the following scenario: suppose the Federal Reserve issues an additional 5% of the total supply of US Dollars in order to fulfill increased demand. This additional 5% would be allocated proportionately across all accounts holding USD. So, if you had $2,000 in your bank account before the change in supply, you would now have $2,100. In such case, the US Dollar would remain non-dilutive since your share of the overall supply of Dollars would stay same after the adjustment.

To conclude this section, Bitcoin is non-dilutive and inelastic. The US Dollar is a fiat currency that is both elastic and dilutive. Because Ampleforth is both elastic and non-dilutive, you'll always hold the same share of the total supply, even if the quantity of your AMPL tokens changes automatically. Ampleforth attempts to tackle the following problems by having this unique feature: Inelasticity problem; Fixed supply cryptocurrencies are prone to rapid demand shocks, making denominating things more difficult. Diversification problem; Today's cryptocurrencies are highly connected, posing a diversification difficulty. In principle, AMPL's unique incentives allow it to decouple from the price trend of Bitcoin.

The Ampleforth protocol can exist in one of three states: expansion, contraction, or equilibrium. Let's introduce another concept before we describe how they work: price oracles.

External prices are provided to Smart Contracts using Price Oracles. In Ampleforth, price Oracles serve two primary tasks. The first is to offer a current AMPL to US Dollar exchange rate. The second step is to calculate the Consumer Price Index. The CPI is used to calculate a target price, which is a price of 1 AMPL that the Ampleforth protocol attempts to achieve. The current target price is $1.009. The target price is a key aspect of the protocol since it is used in conjunction with the current price to decide if the total supply of AMPL should be changed.

Let's return to the Ampleforth states now.

Expansion is a word that has a lot of different meaning.  The quantity of AMPL tokens is proportionately raised across all wallets that hold AMPL tokens in this state. Let's have a look at an example. Assume you pay $1 for 1 AMPL. Because of the rapid increase in demand for AMPL, 1 AMPL is currently worth $2, which is more than our target price of $1.009. The Ampleforth protocol will seek a price supply equilibrium in this case by increasing the supply of AMPL, resulting in 2 AMPL at $1 each.

Contraction is a term used to describe the process of This is, as one might imagine, the exact opposite of the expansion state. The quantity of AMPL tokens is proportionally reduced across all wallets holding AMPL tokens while the system is in the contraction state. So, if you buy 1 AMPL for $1 and the price lowers to $0.5 owing to a decline in demand, the system will lower the supply of AMPL. As the price of 1 AMPL returns to $1, you finish up owning 0.5 AMPL worth $0.5. One thing to keep in mind is that the algorithm can only alter AMPL supply. Of course, it can't set the price directly. External participants must notice the shift in supply, which should, in theory, move the price in the right direction.

The algorithm does not seek to increase or decrease the supply of AMPL in the last state, which is equilibrium. This is essentially a position in which there is no need to act because the current price is within the target price's range.

A rebase function in the protocol allows for automated expansion and contraction. The rebase function can be invoked every day at around 2:00 a.m. UTC. The target price and current price of AMPL, or to be more exact, the 24-hour volume-weighted average price, are obtained using price oracles. The algorithm identifies the current price of AMPL as equilibrium if it is within 5% of the target price and does not adjust the supply of AMPL. The supply increases if the current price is higher than the goal price + 5% of the target price. The supply contracts if the current price is less than the target price minus 5% of the target price. If the current price of AMPL is $1.10 and the target price is $1.01, the system is in the expansion state because ($1.009 + $1.009) x 5% is $1.05945, and $1.10 is greater than the maximum price that can still be considered equilibrium.

The equilibrium threshold is the percentage that is employed in the rebase function. It's one of the Ampleforth protocol's two primary parameters. A smoothing factor, sometimes known as a dampening factor, is represented by the second parameter. To mitigate sudden supply swings, the dampening factor is utilized. The technique now distributes the supply shift across a 10-day period. This means that if the rebase function results in a 50% expansion, the 50% will be spread out over 10 days, resulting in a 5% supply increase on the day the rebase function is executed. The rebase function is run once per 24 hours at the most. This process is likewise stateless, which means the protocol has no recollection of the previous day's supply change and must recalculate the possible supply change each day using the most up-to-date data.

The Ampleforth protocol is implemented on the Ethereum Blockchain as a series of Smart Contracts. The AMPL token uses the ERC20 interface and may be readily traded on decentralized exchanges like UniSwap. The protocol is chain-agnostic, and AMPL tokens can exist on many platforms at the same time, according to the whitepaper, therefore AMPL tokens might appear on other Blockchains in the future.

Ampleforth launched the Geyser incentive program to encourage additional on-chain liquidity. Liquidity providers from the UniSwap and AMPL/ETH pools can use their LP tokens on Geyser to earn extra AMPL tokens. When it comes to the large number of tokens. The most important thing to remember is to look at the total quantity of tokens as well as the price to get a complete view of your portfolio.

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