Today, we start a new series on elastic ecosystem, which will be updated from time to time. Various projects in elastic ecosystem will be discussed from different perspectives. At the beginning, we would like to mention the Ampleforth Protocol, the OG of Elastic Finance. For the concepts of “rebase” and “AMPL”, please refer to Article 2 “How to Realize Elastic Currency?” of the last Series on Elastic Finance. No more details will be covered here.

Misunderstanding

In June, I read a Chinese article entitled “Failed Algorithmic Stabilecoins: What Problems Have AMPL, ESD and Terra Encountered?” In this article, the author introduces the rebase mechanism, and discusses the price game based on it. The final conclusion is that AMPL cannot become an algorithmic stablecoin which should remain stable at the target price due to its “simple and rough” rebase supply mechanism, and that the project no longer positioned itself as an algorithmic stablecoin.

Views in the article have reflected many people’s confusion about AMPL or the concept of “algorithmic stablecoin”: Is the concept of algorithmic stablecoin reliable? The price of AMPL fluctuates, so how can it be a stablecoin? In terms of mechanism design, is the “simple and rough” rebase supply mechanism of AMPL a good thing?

As we all know, the development of an emerging thing is a state of continuous evolution starting from scratch. Before the emergence of the Ampleforth protocol, there were no concepts such as algorithmic stablecoin and elastic finance. Human’s cognitive performance is based on objective facts. Without these projects and experiments, people will show no cognition. Having made this clear, let’s answer the questions respectively.

Dialectical Thinking

• In terms of mechanism design, is the “simple and rough” rebase supply mechanism of AMPL a good thing?

I think it is. Compared with many rising projects that have learned from AMPL’s mechanism, AMPL is simple in elastic solutions, but is not rough. The simple design structure brings an advantage to AMPL - technical reliability. We all know that the fewer parts one machine has, the less likely it is to fail. Similarly, the simpler the design is, the less likely it is to fail. Reliability is more important in the financial field. Further, supply * price = total value. AMPL’s rebase mechanism focuses on two basic points of currency: supply and price. It seems rough to change the total value through the change of token supply, but the design idea is in line with the core of Elastic Finance: to release market risks through the rise and fall of supply, so as to achieve a stable state. Only in this way can we anchor the target price and maintain value in various extreme market environments year after year. Maintain what value? In theory, AMPL can deflate for one year, with assets shrinking by more than 90%. Also, AMPL can inflate for one year, with assets more than doubled, maintaining a value that always fluctuates around the target price range. Is this valuable? Of course.

• The price of AMPL fluctuates, so how can it be a stablecoin?

AMPL is not an algorithmic stablecoin, nor a stable coin. I believe readers who have read my previous articles know that the solution to value storage is elastic currency + graded bonds, and elastic currency can only be used as the infrastructure of the solution, not the whole solution. The reason why elastic currency can be used as the base of value is that it is always elastic. AMPL keeps floating up and down, meaning that we can always “Tranche” the low-risk part out and let it be the foundation of value stabilizer. That’s why AMPL is valuable. Three years ago, the AMPL project initially positioned itself as a “Monetary Experiment”, which may become a stable coin, but its rebase mechanism determines the fact of its floating around the target price. The fact proves that it is impossible to achieve the goal in one step, which it’s too radical. It requires AMPL + SPOT to meet the demand of stable value storage step by step. As mentioned above, these cognitions come from the continuous evolution of things. During three-year-long experiments, the AMPL has found a complete plan to transition its positioning from Experimental token to Utility token.

• Is the concept of “algorithmic stablecoin” realistic?

No. Firstly, I think the difference between stable coins and algorithmic stablecoins lies in credit endorsement. Those with credit endorsement are stable coins, while those without credit endorsement and with self-regulation of algorithmic mechanism are algorithmic stablecoins. Stable coins are similar to USDC and DAI, whose collateral pool or Treasury has equal or excessive collateral. This logic is very straightforward. Algorithmic stablecoins have no credit endorsement. No matter how scientific the mechanism is designed and how complex and advanced the algorithm is, there is always a critical problem: where does the credit come from? And no matter how large the market value is, as long as it is not Bitcoin, it will be regarded as an Altcoin. As an Altcoin, it will fall and rise sharply, deeply affected by market conditions. If the price is forced to be fixed at one dollar (or one euro, one pound, etc.) in one step, the market risk will not be released. And if the risk accumulates too much, there will be outbreaks, causing many problems.

Secondly, for hybrid stablecoins (algorithm mechanism + collateralized credit), I think they are still ordinary stable coins in essence, without qualitative change. Can we really solve the crisis by algorithm mechanism? No. We have to pay a lot to stabilize the credit, right? Then there is no qualitative change.

The article above only represents the author’s personal views. It’s open to discussions!