Many people have been asking what is Ampleforth and how does it come into play in decentralized finance? Some protocols like Compound, MakerDao, and Aave have introduced a new dimension of financial possibilities in recent times. These financial possibilities were supply-based interest rates, flash loans, and crypto-collateralized stablecoins. Among these game-changing protocols, Ampleforth has recently taken the spotlight, and many believe it is for a good reason.
Ampleforth aims to redefine how money works. It combines the best of Bitcoin and stablecoins. In this post, we are going to explore all there is about Ampleforth and its impact on the decentralized finance industry.
What Is Ampleforth?
In simple terms, Ampleforth is a cryptocurrency that is trying to reinvent money. Technically, Ampleforth is a decentralized finance (DeFi) protocol that seeks to completely overhaul how money is designed both inside and outside of cryptocurrency. By creating a stable but flexible currency that can accommodate both inflation and deflation, Ampleforth addresses the problems of traditional finance and decentralized finance.
As a cryptocurrency, Ampleforth can adjust its supply based on demand. It is built on the Ethereum blockchain, and its token is AMPL, an ERC-20 token. When there is an increase in demand, the total supply of AMPL increases. Also, when the demand goes down, AMPL’s total supply decreases. It is adaptive money that adjusts supply based on market conditions. The essence of this is to maintain purchasing power irrespective of economic power. AMPL supply adjustments are made directly to all AMPL wallet balances. This helps to maintain the same percentage of total AMPL supply no matter the raw numerical change.
Many people make the mistake of thinking that Ampleforth is a stablecoin like DAI, Tether, etc. Although the purpose of Ampleforth is to provide the same function as a stablecoin, US dollars do not back Ampleforth. Ampleforth is an adaptive base-money that only seeks to reduce volatility.
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How Does Ampleforth Work?
Ampleforth’s smart contract automatically decreases or increases its money supply based on the market conditions. The interesting part is that the system does this without the control of a “central bank.” Therefore, wallet balances increase or decrease when the demand is high or low, respectively. This doesn’t mean that Ampleforth is dilutive in any way.
When central banks flood the market with the different currencies, they dilute the money supply with inflation. As a holder of the AMPL token, you cannot be diluted by supply inflation. The reason is that adjustments occur proportionally across all users’ balances. Therefore, with Ampleforth, your percentage ownership always remains fixed.
For example, let’s say you are a whale who owns 15% of the network. In this case, you will always own 15% until you decide to sell your stake. The supply of AMPL can expand and contract out of your wallet. This means that the number of AMPL you own can change depending on the market condition. However, your network percentage remains the same. This daily supply adjustment is known as rebasing.
Token Dynamics of AMPL Token
We have already answered the question, what is Ampleforth? Let’s go on to look into the unique token dynamics of the AMPL token. The demand and supply mechanics are what make AMPL token different from other crypto primitives. Primitives are the basis for building a complex system. For example, bitcoin is the base primitive for a censorship-resistant payment rail. However, Ethereum took it a step further by integrating smart contracts to run over the network.
Rebasing is one of the unique attributes of the Ampleforth platform. The AMPL token is a “supply elastic” token. Therefore, the supply of the town changes in response to the price per unit. This price adjustment happens every night at exactly 7 pm Pacific time. This process of supply adjustment is known as rebasing. However, rebase is non-dilutive in the sense that it doesn’t change the percentage of the token you hold in your wallet.
According to economists, when demand and supply in a market are in perfect balance with each other, they are in a state of equilibrium. In the case of Ampleforth, equilibrium is attained when a change in demand gives rise to a one-for-one change in supply. For example, if there are 50,000 AMPLs and the price increases from $1 to $2 due to an increase in market demand, the network will set its target price at $1 and expand supply by 100,000 AMPL. The process whereby the supply would increase from 50,000 AMPLs to 100,000 AMPLs is called a “rebase.”
Most people think that rebase dilutes existing token holders, but that’s not the case. It would be best if you thought about it as owning a fixed amount of the network instead of a fixed amount of tokens. The process is executed in a decentralized manner leveraging the unique capabilities of ERC-20 tokens. Therefore, without the Ampleforth system stealing market share from any holder, these 150,000 AMPLs created by the protocol will be proportionally shared to all AMPL holding addresses. Equilibrium will be achieved when a proportionate 2× decrease in price meets the 2× increase in supply. This keeps the market capitalization stable at $100,000, from our cited example.
By creating a financial incentive for users, Ampleforth helps the network to reach equilibrium. However, the network relies on profit-seeking traders to ensure equilibrium is returned on the demand side immediately the change in supply goes through. The AMPL token is an asset whose price is determined by the free market. Arbitrageurs can sell their newly acquired AMPLs for $2, thus creating market pressure and returning AMPL’s cost to equilibrium at the initial $1.
The Use Cases of Ample Token
We have known what Ampleforth and its token dynamics are. Do we have any use for AMPL tokens? The answer is a big yes. AMPL tokens serve as a medium of exchange. Ampleforth can scale its supply to meet the demands of billions of users worldwide. However, it can also contract supply if it is only serving a paltry number of 1,000 users.
Due to its elastic supply, Ampleforth is an ideal asset to build a digital economy around. In this form, it can become the perfect collateral for DeFi. The countercyclical behavior of Ampleforth makes it an excellent addition to a crypto portfolio. From a broader perspective, Ampleforth aims to offer an independent alternative to central bank money. This is a long-term goal, and Ampleforth must first gain the trust of the community. It has to prove its utility as a reliable medium of exchange and store of value. Ampleforth also aims to become a multichain asset in the future. A multichain platform helps in the creation and deployment of private blockchains.
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The Key Takeaways From Understanding What Is Ampleforth
- Ampleforth (AMPL) protocol has an elastic supply that can contract or expand due to the market demand.
- Its unique token dynamics make it a promising form of collateral for decentralized finance (DeFi).
- AMPL token is not a stablecoin because it doesn’t eliminate market volatility.
- Ampleforth is adaptive money that aims to integrate the scarcity of bitcoin with the elasticity of fiat.
Knowing what Ampleforth is and its use cases are essential for every DeFi enthusiast. Although the project is still in its experimental stage, the potential is vast. For the project to achieve its goals, the broader crypto market needs to accept that it is primitive that offers value to users. The project is currently a high-risk play with an immense payoff provided the network achieves its vision.
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