By 3 they come

Rebase, Tranche, and Rotations have been engineered to design a System that outputs a Digital Asset with highly desirable properties:

• Inflation Resistance

• Zero Liquidations

• De-Peg Resilience

This Digital Asset referred to as a Decentralized Flatcoin, and it is a promising solution to the perennial problem of Inflation. This Digital Asset is SPOT.

This post will provide a broad overview of the System Design to help Public Good oriented communities like Gitcoin in their directives to #fundwhatmatters. In theory, these concepts can be re-engineered for a variety of use cases (e.g., GTC-backed “stablecoin,” Value accrual for Hypercerts to reward positive impact, etc.). And as we’ve come to learn, with Smart Contracts theory can quickly become practice.

As you read the following and gain familiarity with the concept of Price & Quantity inversion, it’d be helpful to likewise flip the notion of Stabilizing Value and restate it as Minimizing Value Loss.

Split

Supply Elastic Assets Rebase

By inverting Price with Quantity, Price Elastic Digital Assets become Supply Elastic. They respond to changes in market demand by adjusting their Supply:

• Increased Demand → Number Units (Quantity) of the Asset go up

• Decreased Demand → Number Units (Quantity) of the Asset go down

Let’s imagine that a Smart Contract could “wrap” ETH so that it becomes Supply Elastic. If the price of such a Supply Elastic ETH were to increase from $1,000 to $1,100, then instead we would have 1,100 ETH tokens worth $1 each. Likewise, if lesser demand were to reduce the price - this would translate into a lower quantity of tokens worth $1 each:

No need to strain our imagination; the Button Wrapper is a Smart Contract that “wraps” Price Elastic Digital Assets to facilitate conversion into Supply Elastic Digital Assets, or vice versa.

Advantage of Supply Elasticity and Relevance in this context of a Digital Asset that is Inflation-Resistant, Liquidation-Free, and Immune to De-Pegs; a Solution to Inflation:

While Price Volatility/Elasticity cannot be manipulated (centralized mechanisms over price controls always backfire), Supply Volatility can be differentially parametrized.

AMPL is a natively Supply Elastic Digital Asset that returns to its Price target purely based on free market forces. Its Price Target is the 2019 CPI-Adjusted U.S. Dollar; in 2019 1 AMPL = $1, and today 1 AMPL = $1.16. Every 24 hours AMPL’s Supply will either Expand or Contract based on its time weighted average price (TWAP), while market actors are naturally incentivized to push it closer to its price target. Expansion & Contraction of Supply are known as a Positive Rebase & Negative Rebase, respectively.

Supply Elasticity is the first step towards Minimizing Value Loss by separating Volatility from Price to Quantity.

SPOT is a Decentralized Flatcoin that separates Price Volatility almost entirely from AMPL’s Supply Volatility, which leads SPOT to track the Price of a 2019 CPI-Adjust U.S. Dollar ($1.16; June 2023). AMPL & SPOT can be replaced with ETH & ETH-Perpetual, or GTC & GTC-Perpetual, and so forth; further context below.

Note on Parameterized Supply Volatility: AMPL’s Rebase Parameters have been adjusted according to this proposal: https://forum.ampleforth.org/t/rebase-curve-upgrade-proposal/327. Per 24 hours, AMPL supply can increase - rebase positively - no more than +10% and the supply can decrease - rebase negatively - no more than -7.78%. Even if AMPL’s price somehow dropped to 0; its Supply would contract no more than ~8%. This is further smoothed out via Time-Weighted Average Pricing (TWAP).

Stack

Rebasing Assets Tranche

Continuing with the Supply Elastic buttonETH token example above, we can conceptualize Tranche as a Vertical Segmentation of Risk in Virtual (EVM) Space. Tranches can be split into any number of configurations; e.g., A, B, and Z below. In a “Waterfall” fashion, As are paid out before Bs, which are paid out before Zs upon maturity.

In the case of AMPL-SPOT, AMPL is segmented into Senior A-Tranche and Junior Z-Tranche. The Tranche is essentially a short-term 28 day bond, which is redeemable for respective units of AMPL upon maturity. Because AMPL Supply can contract no more than 8% per day (if Price somehow = $0, the maximum contraction would be -8%), AMPL Senior A-Tranche is effectively insulated from Value Loss. Over the past 6 months since the system has been live, Senior-A Tranches have not lost value over any 28 day interval. This 28 day duration is also referred to as a Vintage.

Churn

Tranche Rotates through Collateral Set 

Fresh AMPL Senior-A Tranches are entered into a Rotating Collateral Set every 7 days. They can be rotated back in after 28 days to sustain the momentum, or otherwise allowed to degrade into raw AMPL.

Because a Senior-A Tranche of AMPL will not lose Value (contract in Supply more than 80%) across a Vintage (a 28 day period of time), market participants confidently expect 1 Senior-A Tranche = 1 AMPL = $1.16 (May 2023) per Vintage.

Simply put,

the Digital Asset SPOT is a Note instrument that is collateralized by such Senior-A Tranches of AMPL which are insulated from Value Loss (Supply Contraction) as described herein. Resultantly, SPOT’s Price has been more stable than AMPL’s. As the market matures and the ecosystem grows, a dynamic equilibrium is expected to emerge in which SPOT trades tightly with AMPL. I.e. 1 SPOT = price of 1 AMPL = $1.16 (June 2023); and likely higher in the future as Inflation inevitably increases. 

Importantly, this is how SPOT maintains Purchasing Power through time which is tied to the 2019 CPI-Adjusted U.S. Dollar. Hence, SPOT = Decentralized Flatcoin.

Why is SPOT resilient against Liquidations and De-Pegs?

Proportional Redemption

SPOT can be redeemed for the underlying Senior A-Tranches, but only proportionately across Vintages. So if a user wanted to redeem 100 SPOT for the underlying Senior A-Tranches, then redemption would result in 25 Senior A-Tranches across each Vintage. This prevents a bank-run like scenario which recently led USDC to deviate from its peg of $1 - market actors lost confidence that USDC could remain fully backed by its stated collateral. In contrast, SPOT is completely on-chain therefore Information Asymmetry and mismatch between expectations & reality is significantly minimized. Market participants can always expect SPOT to be mechanistically collateralized by the rotating Senior A-Tranches, and consequently, by AMPL.

Therefore even in black swan events, SPOT might bend (price may deviate) but will not break (de-peg significantly due to a bank-run type event; e.g., UST).

Over-Collateralization

SPOT:AMPL ratio is 20:80. SPOT is heavily over-collateralized by AMPL (A & Z Tranches). More recently, the ratio was changed to 25:75; the System remains functional and unaffected.

Conclusion

The combination of Elasticity, Tranche, and Rotation can promote Value accrual - or, minimize Value loss - in most Digital Assets designed in this way.

In fact, our Nervous System employs similar mechanisms to reverse Information Entropy. Stated another way, this is how the Nervous System minimizes Free Energy which will always be “Free” and perpetually leak from the System.

Neurotransmitters are also natively Supply Elastic.

As AMPL is a Building Block in Decentralized Finance, Neurotransmitters are the Building Blocks in our Nervous System. In the Active Inference framework, Ethereum is a Model of the World.

That is, Nervous System = Ethereum; Brain Regions = DAOs; Neurons = Nodes; Neurotransmitters = (Supply Elastic) Digital Assets.

If Nature has evolutionarily moulded Life forms to adopt Supply Elasticity, then it behooves us to go with the flow - be like water.

See Elemental Model of the World for further context; BTC = Earth; ETH = Water; AMPL = Fire.