Elastic Finance - Lending
Sept. 18, 2020, 4:57 p.m.
Ample: A Non-Dilutive Asset That Borrows Like A Stablecoin
The Ampleforth Roadmap recently described AMPL as a monetary innovation and building block for the future of finance that aims to be a cross-chain value highway. Borrowing and lending is fundamental to this future, and AMPL exhibits unique properties that make it an attractive asset for this. Money markets built upon elastic assets enable borrowers and lenders to take advantage of safe debt-denomination and collateral diversification. This post breaks down how.
Ample borrows like a stablecoin
There are many reasons people borrow money, but one is to leverage currently held assets in order to invest in additional ones. For example, Alice holds ETH and wants to invest in YFI, but she doesn’t want to sell her ETH to do so. So instead, she deposits the ETH into a lending protocol like Compound, borrows DAI, then uses the DAI to buy YFI. In this way, Alice is now long both ETH and YFI without selling any of her ETH.
Stablecoins like DAI, USDC, and USDT comprise the vast majority of borrowed assets in DeFi because they provide safe debt-denomination. Eventually, Alice will have to pay her DAI loan back in order to withdraw her ETH and realize the gains of her leveraged investment in YFI. Even as ETH and YFI fluctuate in value, though, she knows that her loan amount is stable. This makes leveraged investing more predictable for traders. It reduces the chance of loan default when the intermediary asset (and therefore loan amount!) suddenly increase in real value.
AMPL is not a stablecoin by conventional definitions, but it does borrow like one. Where debt is denominated in fixed AMPLs: If Alice deposits ETH in order to borrow AMPL, then uses AMPL to buy YFI, she knows that she will always owe the same number of AMPL, no matter what happens to the Ample network’s expansions or contractions.
Remember, since Ample automatically adjusts supply in response to demand, the value of 1 AMPL always tends towards the price target of the 2019 US Dollar. This is how a non-dilutive currency can act as a safe denomination for debt. In Alice’s case, her debt denominated in AMPL remains fixed, while the value of that debt expressed in purchasing power tends toward price-stability.
This is all without relying on centralized stablecoins like USDC, oracles, or collateralized stablecoins like DAI, which are correlatively subject to macroeconomic shocks and liquidity crunches. AMPL reduces the chance of cascading failures that lead to defaulted loans and liquidation, while still remaining non-dilutive and non-collateralized.
- Lending AMPL trades exposure to rebases for income from interest
- AMPL can be a diversifying agent in a basket of collateral
People may wish to borrow AMPL because of the unique properties mentioned above, which leads to lenders being able to earn significant interest from those borrows. This makes AMPL useful on these platforms, even if the collateralization ratio starts at 0 (as is likely to be the case since AMPL is such a new and volatile asset).
AMPL lenders reduce their exposure to daily supply rebases in exchange for earning interest from borrowers. For example, AMPL owners who lend 50% of their AMPL to earn interest, only expose the remaining 50% to a possible negative rebase. In this way AMPL fits several different investment strategies and investor profiles.
Lastly, leveraged traders looking to borrow large sums often build diversified baskets of collateral in order to reduce aggregate volatility and protect against liquidation. As explored in the Gauntlet Network’s independent report on the Ampleforth protocol, AMPL exhibits a unique volatility fingerprint that makes it less correlated to ETH, BTC, and other DeFi assets. This makes AMPL attractive for diversifying collateral risk for borrowers when collateralization ratios are eventually raised.
The Link Between Lending & Liquidity
The Elastic Finance Stack shows lending and liquidity stacked on top of each other for good reason. Healthy money-markets require deep liquidity so that borrowers can easily repay their loans. In the Alice example above, when she wants to realize the gains from her leveraged trade, she will need to sell YFI back into AMPL in order to pay back the loan denominated in AMPL. If the borrowed asset faces a liquidity crunch for any reason, such as DAI during Black Thursday, then traders must either pay huge slippage fees to swap for the borrowed asset or fail to repay the loan as the value of their collateral goes underwater and gets liquidated.
This is why the Ampleforth roadmap prioritized deep liquidity prior to more advanced financial use cases such as lending, and committed to 10 years of liquidity mining programs. Deep liquidity means less crunch, which means healthier money markets for both lenders and borrowers.
Ampleforth is committed to a long-term vision for AMPL. As a building block for the future of finance, it will unlock elastically native money-markets that provide unique properties for lenders, borrowers, and leveraged traders alike.
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