Is AMPL really immune to runaway inflation / deflation?
![]() | By: brandoniles April 24, 2020, 5:34 p.m. |
I got this question today over email and I thought I'd post it here with my answer here as well.
I'm still stuck with a core question regarding the incentive to hoard / sell AMPLs, and wondered if you could help me out with this:
How does adjusting the supply change these incentives (as mentioned on your website: “...This automatic supply policy is countercyclical and nondilutive, making the Ample immune to both runaway inflation and runaway deflation”)?
At a system level -- since everyone gets the same amount added / removed from holdings -- don’t you still have the same effect? I have a hard time understanding how this makes AMPLs immune to runaway inflation/deflation.
If you haven't already, I recommend reading this whitepaper we published in collaboration with our academic advisors at the Stanford Hoover Institute. It goes into the different incentives in the market.
At a high level it's a mistake to assume that every actor in the marketplace has the same trading thesis and risk preference. Some people are generally holders, and some people are generally traders who like volatility. You can clearly see this in traditional markets, so this is nothing specific to crypto.
For example, "index fund" types will happily lend equities to short-sellers. The lenders there look to get predictable small gains, the short-sellers look to get shorter-term profits from volatility. Two different traders with different profiles meet, and these transactions happen. If everyone was the short seller or everyone was the lender this wouldn't take place.
Similarly for AMPL, there are generally holders and generally traders. Traders like to make profits on volatility. So even though the system makes the same adjustments across wallets, it doesn't mean that every trader reacts to it the same way. When there's an expansion (or contraction) from rebases, there's a mechanical change to the system. This temporary increase (or decrease) in Price x Supply creates sell (or buy) pressure that doesn't exist for other assets.
That said, while AMPL's market cap is so low, it might very well be the case that most actors in the system are speculating on overall growth. When that's the case, AMPL may act similarly to a deflationary asset like BTC. That's not unexpected, and not necessarily a bad thing right now. The deflationary nature of BTC was definitely important in its early growth. Bootstrapping value is not an easy thing to do.
The problem with BTC was that there was no future release valve for this deflationary quality. We don't call AMPL a stablecoin right now, because it may be highly volatile in its early life. That's ok.
However, wouldn't it be nice if there was a BTC that evolved into a stablecoin? While not exactly precise, I think it's an easy way to think about AMPL.
Find me on twitter at @brandoniles
The key thing to note here, is the problem we're talking about concerns the use of commodity-monies (like gold) as a reserve asset in support of a wider banking system.
Systems like the Gold Standard (or Bretton Woods standard) — are immune to inflation so long as bank-money is redeemable for gold at a defined rate.
In the case of Bretton Woods foreign governments could trade something like
$36
for1 oz of gold
.This redeemability ensures that folks can't just print money without the necessary gold in place to back it.
Because gold is a fixed supply resource (like Bitcoin) no runaway inflation can occur.
The problem with gold as a base-money is that its vulnerable to runaway deflation. Runaway deflation happens when the rate of demand for bank-money outpaces the rate at which banks can obtain the gold necessary to back it—ie: when people refuse to introduce more gold into circulation because they expect it to grow in value.
In the case of AMPL
Supply automatically increases when folks are demanding more AMPL than is currently available. At the time of writing the price per AMPL is
~$1.30
. Since this is greater than the system's Price Target~$1.00
the system has entered a state of expansion.As a result, the protocol is actively increasing the supply of AMPL in each user's wallet. Until the price is restored to its equilibrium target, each day users receive proportionally more AMPL via the daily
rebase
operation. But if nobody sells, then users are receiving more AMPL still valued at~$1.30
.Eventually this phenomenon engages "fast" traders (who operate on short time windows) in a race to sell.
Because these people know the supply increases cannot continue forever, there is an economic incentive for profit-seeking "fast" traders to sell just before the others inevitably do. To better understand this have a look at Thinking Fast & Slow from the redbook.
Ultimately this selling by "fast" traders, introduces more supply into circulation, while price-market forces would otherwise encourage people to hoard (ie: the policy is countercyclical). However because the supply increases are proportional to your holding of AMPL, it cannot dilute the total value of tokens for folks who are simply holding through.
It's worth noting, that this vulnerability to runaway deflation—is one of the only known problems with gold as a base-money. In other words, it's one of the only ways to improve upon monies like gold.
Hope that helps
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