A Series of Articles on Elastic Finance, Article 3: How to Realize Graded Bonds?
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July 8th, 2022

Special thanks to community member @merkleplant for proof-reading and brilliant suggestions for this article. Don’t forget to check out Ampleforth wiki for more references!

As mentioned before, elastic currency + graded bonds are the ultimate solution to value storage. Having finished talking about the logic of elastic currency, we will explain the final puzzle of value storage - the graded bonds plan.

Source: investopedia.com
Source: investopedia.com

In traditional finance, graded bonds are classified into different ratings according to the risk through the credit rating system. A-rated bonds with the lowest risk and the lowest yield are called “Gilt-edged bonds”, while bonds with the highest risk and the highest yield are called “Junk bonds”. In the elastic financial ecosystem, we uphold the concept of rating, extract different parts of the elastic currency, and convert them to a two-tier (high-volatility + low-volatility) or three-tier bond (high-volatility + medium-volatility + low-volatility) structure. The high-volatility bond bears the highest risk and the highest elastic supply yield, while the low-volatility bond obtains the lowest risk and the lowest elastic supply yield.

Source: https://www.instagram.com/p/CfHe43QFJY7/?hl=en
Source: https://www.instagram.com/p/CfHe43QFJY7/?hl=en

Taking the Ampleforth Protocol as an example again, the way of grading in this protocol is called "Tranche", that is, dividing an AMPL into several different levels of Tranches, then A-Tranches means A-rated bonds, B-Tranches means B-rated bonds, and so on. Ampleforth Protocol is developing a perpetual note SPOT, which is composed by A-Tranches, backed by fully collateralized AMPL derivatives, yet with no elasticity of AMPL. SPOT still in development, but if SPOT adopts a three-tier bond structure, the ratings may be as follows:

Source: Redemption Flow - Buttonwood (prl.one)
Source: Redemption Flow - Buttonwood (prl.one)

According to the historical price range of AMPL, its price fluctuated back and forth between $0.5 and $1.5 most of the time, and never fell below $0.5. According to the rating logic, convert the part of $0 to $0.2 to A-Tranches (the value of each unit of A-Tranches is $0.2), and you will get the highest credit and the best value-preservation, but no supply volatility. Convert the part of $0.2 to $0.5 to B-Tranches (the value of each unit of B-Tranches is $0.3), and you will get medium credit but no supply volatility. Convert everything upwards from $0.5 to Z-Tranches (the value of each unit of Z-Tranches is $0.5 or $0.5+), and you will get the worst credit with all supply volatility.

Slight Decrease in Value, Source: Redemption Flow - Buttonwood (prl.one)
Slight Decrease in Value, Source: Redemption Flow - Buttonwood (prl.one)
Increase in Value, Source: Redemption Flow - Buttonwood (prl.one)
Increase in Value, Source: Redemption Flow - Buttonwood (prl.one)

When AMPL enters the expansion state, the number of A-Tranches will not change, the number of B-Tranches will not change, and the number of Z-Tranches will increase greatly. On the contrary, once AMPL enters the contraction state: when AMPL does not fall below $0.5, the number of A-Tranches will not change, the number of B-Tranches will not change, and the number of Z-Tranches will be greatly reduced; when AMPL does fall below $0.2, the number of A-Tranches will be partially reduced, the number of B-Tranches will shrink to zero, and the number of Z-Tranches will shrink to zero.

Put five units of A-Tranches together, and a SPOT is produced, a perpetual note worth of $1 (5*0.2 = 1). Please note that since SPOT has not been officially launched, what we know now is that SPOT has no rebase, no liquidation and does not need a price oracle machine. Its price may fluctuate rapidly within a certain range, but as long as the underlying elastic currency does not fall below $0.2, its value can be maintained. There is no need for sovereign or organizational credit endorsement, fiat or stable coin collateral. With the help of the ERC-20 standard, it can cross chains and circulate normally in a decentralized world.

The performance of SPOT needs further observation and study after it is really launched. Using a less appropriate metaphor, the relationship between AMPL and SPOT is like crude oil and gasoline, for one is raw materials and the other is final products. What ordinary people need is gasoline, which can be directly added to vehicles to reflect its value, while the value of crude oil needs to be reflected through processed products, and if we want more gasoline, then we need more crude oil.

Delivered by decentralized finance, AMPL+SPOT are the most innovative and persuasive answer to the value storage problem. In the coming article, we will discuss the visions of elastic finance and try to figure out what it will look like in two years.

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