AMPL/USDC Smart Pool on Balancer
Oct. 5, 2020, 8:24 p.m.
Bridging Floating Price and Stablecoins
The new AMPL/USDC smart pool jointly developed with Balancer removes most impermanent loss normally incurred by liquidity providers on other AMMs like Uniswap. This will demonstrate how Ampleforth is a compelling crossover currency between the worlds of floating-price tokens and stablecoins, and thus a compelling base trading pair on AMMs.
Ample, the fast lane on the liquidity superhighway.
Where to Find It
You can find the AMPL/USDC smart pool here.
Elastic Supply and Impermanent Loss
Liquidity providers incur 'impermanent loss' when the values of the assets within the pool deviate from one another. This is called 'impermanent' because the loss is recouped when the asset values return to their original ratio.
This is why floating price tokens are not usually paired with stablecoins. If one token's value increases 10x while the stablecoin remains constant, liquidity providers lose (versus holding the assets). Impermanent Loss is at odds with typical LP motives because they are not just looking for trading fees, but also for long-term growth of the asset itself. For LP's, impermanent loss is bad.
Automated MMs vs Traditional MMs
The easiest way to explore the headroom for improvement in AMMs is by comparing them to traditional market makers. If an AMM like Uniswap existed on the NYSE, it would quickly get out-played by more efficient, more informed market participants.
What separates a "constant product" market maker like Uniswap from a traditional market maker? In short, information. Lack of information is a big source of impermanent loss.
Here's a quick example:
* Uniswap holds inventory of Rice and Dollars.
* Uniswap quotes Rice inline with the market at $12 / cwt
* An ecological disturbance causes Rice supply to drop, and price skyrockets to $25 / cwt
Given that Uniswap doesn't know about the rice commodity market, it would simply continue selling at the quoted price of $12 until it's pricing curve reaches parity. Until this happens, it's selling its inventory for less than it's worth. This is where most impermanent loss comes from. If Uniswap had information about the preceding event this could be removed.
Ampleforth is a base-money digital currency with an elastic supply that adjusts each day according to demand in the marketplace. The protocol effectively seeks to shift volatility from price to supply. The supply can shift dramatically over time, while the price stays within a band around the price target of the 2019 US Dollar. This supply change is similar to the rice example above, and Uniswap's lack of information can cause impermanent loss for liquidity providers of AMPL and stablecoin pools. This is why the deepest AMPL liquidity pool on Uniswap is AMPL/ETH.
For traders, though, it's nice to trade against a stablecoin. As you move in and out of positions, you remove exposure to the volatility of an intermediate asset and you get a convenient denomination of trade amounts. It would be ideal to serve both liquidity providers and traders at the same time.
AMPL/USDC Smart Pool on Balancer
Balancer is a generalized AMM that allows customizable number of assets and weights within a pool. So while you can only do 50/50 pools on Uniswap, you can have 80/20 or even 95/5 pools on Balancer.
Since Ampleforth shifts volatility from price to supply, and supply changes at a particular point in time, Balancer can update the smart pool weights at the same time, thus removing all impermanent loss associated with supply changes. This makes Impermanent Loss with Ample "truly impermanent".
Here's a quick example of how this would work on Balancer:
* AMPL/USDC smart pool starts out with even 50/50 ratio.
* AMPL supply grows 2x, and the pool automatically shifts to 33/66 ratio.
* AMPL supply contracts to original amount, and the pool rebalances to 50/50 again.
As the supply of AMPL grows and shrinks, so does the ratio of weights of AMPL and USDC in the smart pool, removing opportunities for arbitrage actors to remove value from supply changes. Finally, a floating price base-money like Ampleforth can be traded against a stablecoin in a way that serves both liquidity providers and traders.
Does this remove all IL? Not quite. Ample still has temporary deviation away from $1, but these deviations are much shorter in duration and magnitude than long term market cap changes. There is also loss from the dollar's natural depreciation vs the 2019 USD target due to inflation, but this is very slow and very small.
So what this AMPL/USDC smart pool achieves is to protect LPs from any further value leakage due to arbitrage upon the abrupt price changes at rebase, which happens on conventional AMMs (Uniswap or shared Balancer pools).
Elastic Finance: The Bridge Between Floating Price and Stable
Until now, the AMM ecosystem looked like this for liquidity providers:
* Pooling floating price-to-floating price, use whichever AMM you like.
* Pooling stablecoin-to-stablecoin, use Curve.
* Pooling floating price-to-stablecoin, cross fingers and hope trading fees are greater than impermanent loss.
Ampleforth bridges the gap between floating-price tokens and stablecoins because smart pools account for its elastic supply. Ampleforth can trade against floating-price tokens like a floating-price token, yet it can also trade against a stablecoin like a stablecoin without impermanent loss. This makes Ampleforth a compelling crossover currency and a seriously useful base trading pair token on generalized AMMs.
This is one example of how elastic tokens like Ampleforth can add meaningful value to the decentralized financial ecosystem. But there are many more ways Ampleforth can benefit AMMs, not to mention lending platforms, too!
Ampleforth is committed to building out the Elastic Finance stack. This is the first step to upgrading DeFi to EFI--"Elastic Finance"--and there's a lot more coming soon.
Find me on twitter at @brandoniles