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Central-Banks—A Bad Influence On Decentralized Finance

Modern money is debt and debt is money—Philip Coggan. Few would disagree with this claim. Yes, the v ...


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Take a normative position, make sweeping enemies, only then can you make a difference—I imagined Paul Krugman, dressed as a Jedi, repeating this message. He’s right after all, the world has changed. Ideologically colorblind statements rarely pierce the veil. Yet there are still truths to divine from differentiating between normative and positive economics, even for pundits like Paul. Unlike positive economics, which concerns itself with describing things “as they are”—normative economics is a perspective that concerns itself with value judgements of “what ought to be.” Undoubtedly, both lenses are important. After all, in order to navigate successfully we typically need accurate knowledge of 1) where we are, and 2) where we desire to be. Indeed, this interplay is well-captured in the course of policymaking. My point of departure here, is simply to ask whether we (the crypto community) are somehow imbalanced in our representation of normative-economic proclamations, compared to positive-economic questions. And if so, how might this imbalance be affecting us? We are the Birth of a New Virtual Nation We are a Future for Our World and Humanity We are Sentinels, Universal and Inalienable We are Creativity and Visionary We are Rights and Freedoms We are Tolerant and Accepting We are Polity and Entity We are Privacy and Security We are Openness and Transparency We are a Dream and a Reality We are Bitnation This poetic ending to the Pangea whitepaper by Bitnation, carries with it normative opinions about a world that “ought to be.” In the paper, its authors describe a future in which individuals can establish borderless “nations,” suggesting that nation-states will “become increasingly irrelevant to our everyday lives,” thereby liberating humankind from “the xenophobia and violence that is nurtured by the Nation State.” I encountered this project through my friend Ramesh Srinivasan, a professor at UCLA who explores technology’s relationship to economic, political, and cultural life. In his latest book, Ramesh draws upon the example of Bitnation to introduce the observation that blockchain projects appear to pervasively root themselves in pre-existing ideological convictions. And then goes on to discuss some of the pitfalls associated with this tendency: “Ideology itself is not inherently a bad thing, but when it drives the development of a technology, the result may look good from some angles and half-baked from others. Bitnation’s shortcomings in this regard are part of a wider trend in which people project their fantasies onto blockchain technology.” By contrast, this abstract from the Ampleforth whitepaper (of which I’m an author) is far less poetic — but serves as a straightforward example of what we mean by a positive economic thesis. Synthetic commodities, such as Bitcoin, have thus far demonstrated low correlation with stocks, currencies, and precious metals. However, today’s synthetics are also highly correlated with each other and with Bitcoin. The natural question to ask is: can a synthetic commodity have low correlation with both Bitcoin and traditional asset groups? In this paper, we 1) introduce Ampleforth: a new synthetic commodity and 2) suggest that the Ampleforth protocol, detailed below, will produce a step-function-like volatility fingerprint that is distinct from existing synthetics. The paper simply: Whenever I tell people that I work in the cryptocurrency space, and they start rolling their eyes, I show them the abstract to the Ampleforth paper. Like clockwork, the reactions I get afterwards are almost always of surprise, delight, and notably relief. This “turnaround” happens quickly—even in loud, crowded, environments. It is as if people suddenly go from thinking crypto is full of delusional extremists, to thinking that we’re scientists, engineers, or otherwise “sane” people. Occasionally, they even think I’m onto something. This table, tracking the evolution of Bitcoin’s narrative over time, shows the asset trending towards an increasingly positive economic thesis. Prior to 2017, we saw narratives attaching themselves to the notion of “replacing” sovereign solutions. The implication being that something is catastrophically broken with existing systems of government, and Bitcoin is the solution. Yet after 2017, we see narratives distancing themselves from concepts of government altogether. Eventually, coalescing into an “uncorrelated asset” thesis which embodies the positive economic description of what Bitcoin is today, without diminishing its potential for global-impact or price appreciation. But why the directional change? Doesn’t the angriest person always win on the internet? Have we not fully transitioned into a post-truth era? Perhaps it’s because a great many people now, want to partake in the upside of Bitcoin as an investment asset, but are unwilling to identify with extremist ideologies. After all, normative economic perspectives are seldom agreeable. Or perhaps the litany of false promises left behind by 2017 evangelists has fatigued the world, irrevocably upping the standard of what the public requires as an explanation for why Bitcoin is a good investment. Natural selection? Whatever the case, I’m reminded of this tweet by Peter Schiff in which he gloats about Bitcoin’s price dropping near the end of 2019. My sense is — there’s something interesting going on — when one of crypto’s most vocal antagonists is caught actively reinforcing a narrative that supports Bitcoin, even as he wishes a swift death upon it. Perhaps that’s the power of positive economics. Thanks for tuning in — see you space cowboys + girls,
Updated by
on April 22, 2020, 10:55 p.m.

I was looking at this table comparing PC, web, and blockchain platforms the other day and couldn’t help but think, DeFi needs better primitives—that is to say, DeFi needs better base-monies. This familiar table presents today’s blockchain development stack alongside the PC and web application stacks of yesteryear, painting the compelling picture of limitless possibilities. Encoded within it, the promise of a new and decentralized finance infrastructure—beyond the reach of politics. Just as HTTP and FTP were the primitive building blocks of the web, today’s decentralized assets, BTC and ETH, are the primitive building blocks of the new DeFi economy. These assets can be arranged to construct instruments for lending, debt, synthetic equities, and more. But today their limitations lie in their volatility and high correlation to one another—hence the requirement for extreme over-collateralization and looming risk of auto-liquidation. Often when I mention this to others operating in decentralized finance, they ask: “What about DAI, isn’t that a stable and decentralized primitive?” “Not quite,” I respond, “DAI is derived from other primitives like ETH.” In Economics, there are: theories of banking, theories of money, combined theories of banking and money—but banks and monies are never mistaken as interchangeable without consideration. Banks have balance-sheets, and at some level of depth, they hold in reserve a type of collateral that lives outside the realm of credit and debt, called base-monies (what we’ve been calling primitives). Base-monies don’t have balance-sheets, they are not collateralized, they are atomic units within a given sector—and the quest for the ideal base money, has long preoccupied monetary economists. Today, decentralized banks like MakerDAO compensate for the high volatility inherent in decentralized base-monies by over-collateralizing, often locking up several times the amount they aim to represent. Even still, risks of auto-liquidation loom ever-present. One promising attempt to break free of this problem, was the introduction of Multi-Collateral-Dai (MCD). The thought being that: perhaps by leveraging a portfolio of collateral assets, their combined volatility could be reduced. Unfortunately, the myriad new cryptocurrencies that followed BTC and ETH, have not helped. Instead, today’s floating-price cryptocurrencies mimic their movement pattern with supernatural closeness. With such hypercorrelations, the risk cannot be diversified away. At present, the MakerDAO project faces increased pressures to introduce centralized collateral assets like Digix Gold. But in a more ideal world, the set of decentralized base-monies would be less correlated, or more stable—this would allow decentralized banks to avoid introducing centralized points of failure. Said differently, uncorrelated defi primitives (base-monies) are the next line of defense against DeFi becoming, just Fi. Still, there’s more to consider than hypercorrelation—and more to learn from the history of base-monies. Not long ago the dollar was redeemable by foreign governments for the base-money, gold, under Bretton Woods. Thriving as the global reserve currency after World War II, demand for US dollars exceeded the rate at which the state could obtain enough gold necessary to continue backing it. Naturally, this imbalance in supply and demand caused the price of gold to soar, further restricting it from circulation in a self-reinforcing cycle. Then, as it is now, the global economy depended on US dollars to function—and the currency was at serious risk of entering a deflationary spiral. The state needed the flexibility to increase its money-supply countercyclically. That is to say—in order to stimulate the circulation of money—the money-supply would need to move against the blind-forces of nature. And since gold was neither sufficiently countercyclical nor elastic, in 1971 US president Richard Nixon was forced to cancel the dollar’s redeemability into gold altogether. Thereafter the money-supply, and thus the value of the dollar, would be determined entirely at the discretion of human policymakers. Bretton Woods Tip #1: The supply elasticity of base-monies matters, particularly when they are part of a broader feedback loop in support of a functioning economy. Bretton Woods Tip #2: Countercyclical economic policies are executed in response to economic shocks to stimulate liquidity, when market forces would otherwise encourage users to hold. Flawed as it was, the Bretton Woods standard enforced a simple set of rules: either the state had enough gold to back the money-supply, or it didn’t—and the world would simply have to deal with it. This straightforward constraint had the benefit of eliminating all possibility of runaway inflation, preventing political tampering, and forcing judicious long-term considerations, around the certainty of said constraint. Eventually this dichotomy between absolute rules and human discretion would captivate the minds of monetary-economists Kydland and Prescott — well into the era of pure fiat monies. The two economists redefined this problem, as the distinction between time-consistent (rules-based) and time-inconsistent (discretion-based) economic policies—and they would eventually share the 2004 Nobel Memorial Prize in Economics for their discovery. Kydland and Prescott, concluded that economic policies made at the discretion of people, however aligned in social objectives, would never result in the objectives being maximized—because discretionary economic planning is not a game played against nature, it’s a game played against profit-maximizing economic agents. The agents’ knowledge of fallible humans behind the curtain, would inevitably distort incentives to encourage the abuse of any discretionary system, forcing undesirable tradeoffs between near-term individual gain and long-term collective well-being. Their discovery left many in the world of Economics missing the simpler days of immutable commodity-reserve-currencies, free from human governance—but with the memory of Bretton Woods still fresh, vividly aware of their costs. Kydland-Prescott Tip: Human discretion (or governance) be it individual or collective, results in suboptimal outcomes, so long as economic actors understand the system can be changed by the individuals in charge. Ultimately, if Nixon had replaced gold with BTC or ETH at the end of Bretton Woods, we wouldn’t have been any better off. But could a new and different base-money now be designed to fit the bill? We certainly think so, and it is with this great macroeconomic puzzle in mind, that we created a new defi primitive: the AMPL. At a high level, decentralized banks like MakerDAO can be viewed as directionally reducing the role of centralized banks. We felt—along similar lines—it was time to gently expand the role of base-monies. In Economic vernacular: the AMPL is a countercyclical synthetic commodity-money, with perfect supply elasticity. It is also an ERC20 token and series of smart contracts—that accepts 24hr volume-weighted-average price-information from oracles—and proportionally increases or decreases the quantity of AMPL’s held in every user’s wallet. The Ampleforth protocol adjusts supply by updating a global scalar coefficient of expansion, in response to deviations from a price-target, once everyday. The AMPL does not have a balance-sheet, it does not retake custody of tokens or airdrop new tokens to adjust supply—and no, it’s not a stablecoin—at least not by the use-cases assigned to the role of stablecoins today. It is a new decentralized base-money. But it does have another unique property. Due to the fact that gains and losses for AMPL holders are reflected in both the quantity of units held—and the price per unit—the Ampleforth protocol introduces a fundamentally different set of incentives. As a result, profit-maximizing actors responding to these unique incentives, produce a step-function-like movement pattern that is expected to be meaningfully less correlated with today’s decentralized assets. Our intent is to fill the near-term void of an uncorrelated primitive and grow into filling the long-term void, of a macro-economically friendly base-money. Thanks for taking the time to hear our thoughts, would love to hear yours!
Updated by
on April 23, 2020, 8:39 p.m.

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"...you are all a bunch of socialists,"
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on July 16, 2020, 2:43 a.m.

hi i have a problem with lost liquidity on unswap pool. is there somewhere here i can get support thanks
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on July 16, 2020, 1:09 a.m.

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How do I view records of AMPL increases for my ERC20 address?
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on July 16, 2020, 12:47 a.m.