The basic workings of Ampleforth are actually really very simple. Once you familiarise yourself with its workings you'll look at Bitcoin and other currencies a bit differently. Ampleforth has a solid website with extensive documentation, befitting of a cryptocurrency with an emphasis on stability which aims to become one of the key units of collateral in the Decentralised Finance space. The docs are helpful and make a lot of sense so I've drawn on these resources for this article.
Ampleforth attempts to solve a couple of problems that have long perplexed economists and speculators in the financial space. To gain a quick understanding of Ampleforth we'll take a look at these.
Ampleforth Is Non-Dilutive
A non-dilutive currency is one where your proportion of the total currency cannot be suddenly diluted or reduced. This happens when government treasuries or central banks choose to print more money, to satisfy increased demand for borrowing and/or to stimulate further growth. If you think about it, when more money is put into circulation the value of the unit currency, dollar or coin that you own has actually been reduced since the proportion of currency you now own is less than it was before more money was printed.
This is a strong, widely held criticism of the central banking system and of government-issued currencies that aren't backed by a commodity. You might recall that in Bitcoin's genesis block Satoshi Nakamoto encoded the Times headline from 3 January 2009:
This can be pretty straight-forwardly read as a criticism of the dilutive nature of quantitative easing (printing more money). Bitcoin avoids this problem by having a fixed supply of currency but this leads to other problems...
Ampleforth is Elastic
Bitcoin has a fixed supply of currency. If there is increased demand for Bitcoin its price will rise because more Bitcoin cannot be introduced to offset this demand. This creates systemic problems, especially when we consider the large number of loans, debts and contracts that we are now seeing in the fast growing realm of decentralised finance. Bitcoin is volatile, both because it has a fixed supply and because of its huge market cap in cryptocurrencies. This makes it unstable and unreliable for contractual use.
The key difference between AMPL and Bitcoin is that AMPL has an elastic supply. The amount of AMPL tokens in circulation changes. But how can this be when Ampleforth is, like Bitcoin, a non-dilutive currency? Despite having an elastic supply where the amount of AMPL tokens in circulation changes, AMPL uses a process called rebasing to ensure that everyone who owns AMPL owns the same percentage of total supply.
What is Rebasing?
The Ampleforth rebasing process may at first appear strange, as is often the case with things that are new, but in fact its based on some very simple economics.
Expansion and contraction. What goes up must comes down. What comes down must go up to reach equilibrium. This equilibrium is a target price. Originally this price was based on the consumer price index (CPI). The price now might roughly represent a combination of that CPI and the current exchange rate of AMPL/USD.
But also note the last bit of the above quote from Ampleforth's website. The Ampleforth protocol... 'depends solely on profit-seeking actors in the marketplace to reach equilibrium.' This is why Ampleforth is not a stablecoin. It's loosely pegged to a target price but not minute-by-minute. The rebase function occurs once a day (at 2am UTC) and furthermore if the price of change in AMPL is beyond 5% the rebasing - amendment to the fixed supply - takes place in gradual, daily stages. This provides large incentives for speculation on Ampleforth, something that other stablecoins (such as Dai) tend to lack.
And now the magic of the system. Or ELI5 (Explain It Like I'm 5 Years Old). Let's look at this graphic that displays the fundamentals of the Ampleforth protocol. I like the colours.
Balances. How much AMPL has everyone got? Balances are purple; fair. You own your proportion of the currency.
Incentives. It's a system that allows for extensive speculation. Studies have shown that trading strategies which aim to predict the rebase are (no great surprise) likely to be most efficient. It becomes clear just how and why Ampleforth is not a stablecoin. OK, I'm a speculator. I look at this. Today it's well out of whack and so I'm going to...
Market. To buy or sell AMPL. The marketplace. Hot and red. There's speculation here (maybe it should have been green actually?) Anyway, I go to market and as happens when people buy and sell crypto...
Price changes.
Policy. 2am UTC comes round and Rebase happens (or doesn't if the price remains within the 'equilbrium threshold' of 5%) based upon various price oracles that calculate an average of the day's trading prices. Policy is rule-based; neutral; blue. Rebase happens and...
Supply changes (AMPL is elastic). The rule-based policies of the protocol (the expansion and contraction of rebasing) strongly lean toward stability in the currency and act as a defence against volatility and systemic risk.
Ampleforth is Strong
The more you look at it the more the whole picture makes a lot of sense, as if this is how a more sensible economy might work. The incentives should be there for market but these shouldn't be wild and dangerous and off the scale uncorrelated hype (a la 'Bitcoin to reach $300K'). With Ampleforth price is dependent upon a rule-based policy. And all the while this is a non-dilutive currency where the proportion of currency you own is not unfairly reduced (by a central banking system seeking to extend cycles of debt).
It's a good looking system. It's got something going for it.
