Understanding Ampleforth (AMPL)
Many in the crypto space are talking about Ampleforth (AMPL) and how this next big token is going to take off. What is Ampleforth though? What is the hype all about? How is it not just another cryptocurrency with short-lived hyped? Let’s find out.
The Ampleforth protocol is implemented as a set of smart contracts based on the Ethereum blockchain. It is, in essence, a new cryptocurrency project with a unique feature of an elastic supply.
What does an elastic supply mean?
An elastic supply refers to the printing or removing money from circulation at will, depending on the demand. Fiat currencies such as the United States dollar (USD) are good examples of money with elastic supply. The federal authorities can decide to print more money if there is more demand for it. But Bitcoin, unlike fiat money, has a fixed supply, and the only way it can accommodate an increase in demand is through a price rise.
Even though elastic supply can be quite useful to achieve price stability, it comes with a certain problem: dilution. When federal authorities increase the supply of dollars by printing new money, they put the money into circulation. That dilutes people’s proportion of the total supply of dollars, making them poorer.
For example, say federal authorities print an extra 5% of the USD’s total supply to meet the increase in demand, and this extra 5% is proportionately distributed across all the accounts holding the USD. So if you had $1000 in your bank account, then you would end up with $1050 after the supply change. This scenario would make the USD non-dilutive; and your proportion of the overall supply of dollars would remain the same even after the adjustment. Essentially, Bitcoin is inelastic and non-dilutive, whereas fiat money is elastic and dilutive.
However, AMPL goes a step further.
While AMPL is elastic, it is also non-dilutive. The non-dilutive mechanism is achieved through supply adjustments applied proportionally across every individual’s bank balance. Even though the number of your AMPL tokens changes automatically, you will always have the same proportion of the overall supply. By virtue of this unique feature, AMPL works out the following problems:
- Inelasticity
One of the major strengths of AMPL is its ability to respond to the need. Fixed supply cryptocurrencies, as Bitcoin and the like, are at risk during fluctuations in market demand. Moreover, constant price changes can potentially be problematic, especially when it comes to denominational things, e.g., services, contracts, or debts.
- Diversification
Other cryptocurrencies, today, are strongly interconnected. But AMPL functions independently. In theory, the essential features make it possible for AMPL not only to disengage itself from Bitcoin’s trends but also to stand out from the rest.
The Role of Price Oracles in AMPL
Price oracles are used to help smart contracts interact with external data to provide external prices. There are two main functions of price oracles in AMPL:
- To provide an expected exchange rate of AMPL to the USD
- To provide a consumer price index (CPI) value
The CPI value represents the USD’s 2019 purchasing power. It, combined with weighted averages for expected exchange rates from Oracles, is used to establish a target price, i.e., the price of 1 AMPL that the AMPL protocol tries to aim for. You can view both the oracle rate and the target price on the AMPL dashboard. As of writing, the value stands at $1.011.
The target price plays a critical role in the Ampleforth protocol as it is used together with the oracle rate price to determine whether there should be a change in the total supply of AMPL tokens.
But all such supply changes are performed gradually, with the daily supply chain capped by the following formula:
(Oracle Price – Target Price) / 10
These changes are also stateless – they are computed based on the available data daily, and are executed as though subsequent changes too would repeatedly be executed 10 times in the following days. Thus, the formula.
What makes AMPL unique?
There are three states that the AMPL protocol can be in:
- Expansion
In this state, the supply of AMPL tokens is proportionally increased across all the wallets holding AMPL tokens. For instance, you buy 1 AMPL for $1, and in case of an increase in demand for AMPL, 1 AMPL is worth $2, which is above the target price of $1.27. In this case, the AMPL protocol will seek a price-supply equilibrium by increasing the supply of AMPL. Thus, you may have 2 AMPL tokens, each worth $1.
- Contraction
When the system is in the state of contraction, the supply of AMPL tokens is proportionately decreased across all the wallets holding AMPL tokens. That is to say, if you buy 1 AMPL for $1 and the price of 1 AMPL drops to 50 cents due to a decrease in demand, the system will reduce the supply of AMPL. In this case, your wallet will have 0.5 AMPL worth half a dollar as the price of 1 AMPL reverts to $1.
- Equilibrium
This is the only state where the algorithm does not seek an increase or decrease in the supply of AMPL. This is a state where there is no requirement to perform any change, as the current price is within range of the target price. Expansion and contraction are achieved automatically with the help of a rebase function in the protocol.
The rebase function executes no more than once every 24 hours. The function makes use of price oracles to get the target price and the current price of AMPL, i.e., a 24-hour volume-weighted average price.
If the current price of AMPL is within 5% of the target price, the algorithm classifies the state as equilibrium and does not change the supply of AMPL. This means that if the current price is higher than the maximum target price that can qualify as equilibrium (target price + 5% of the target price), the supply expands. Similarly, if it is lower than the minimum target price that can qualify as equilibrium (target price – 5% of the target price), the supply contracts.
Ampleforth Platform: The Goals
In the short term, Ampleforth aims at diversifying cryptocurrency portfolios by being less correlated to the price of Bitcoin compared to other currencies. In the medium term, it is envisioned as collateral for decentralized finance (DeFi) protocols. And the long-term goal of AMPL is to create an alternative to centralized banking, that is adaptable to shocks.
There is also a key element involved in this AMPL tokens affair. In addition to the price, the number of tokens should also be looked at to get a better picture of the portfolio. It is, no doubt, an extremely interesting project in the cryptocurrency space; it is equally vital for us to remember that AMPL is still a monetary experiment that may or may not work. Its current market cap makes it high-risk play with a great pay-off if the network achieves its vision. I am going to be keeping a little bag of it – just in case!
