Ampleforth (AMPL): Ponzi or Legit?

Everyone is talking about DeFi (Decentralized Finance) and Yield farming in crypto space. Every day new DeFi projects with world-changing technology (as they claim it) coming. Today we discuss Ampleforth (AMPL) one of the most hyped DeFi projects. Before starting let’s get a brief of What is DeFi and Yield Farming.

DeFi stands for Decentralized Finance. DeFi is an ecosystem of applications built on blockchain to provide permissionless and non-stop services. Smart contracts, protocols, and digital tokens are the main components of DeFi. The DeFi protocols are programmable, comparable, and decentralized. The smart contracts control all the transaction without the need or human interface (or say minimum human interface).

Yield Farming in simple words the same as crop farming. The farmer produces crops on a piece of land and after some time harvest, it to gain profits. In crypto, the investors put (lend, stake, etc) their tokens or coins to generate more profits from them. In other words, only investing in Ethereum is not considered as yield farming. When you lend your Ethereum to gain additional returns on the natural growth of ETH, Yield Farming occurs. 

That’s enough for the introduction. Ampleforth (AMPL) attracts my attention because people claiming it’s a new monetary system. Ampleforth is compared with bitcoin and that’s not a usual thing nowadays, if it is compared with Ethereum or named as ETH killer that doesn’t bother me. Let’s start with the basics 🙂

What is Ampleforth (AMPL)

Ampleforth is a new synthetic commodity. Ampleforth (AMPL) is a cryptographic protocol for smart commodity money. AMPL tokens are built to maintain their value close to $1 like stablecoins by alternating the total supply according to the demand. The AMPL whitepaper says that Bitcoin cannot be used as a global currency because of its inelastic supply.

The AMPL protocol always looking for supply-demand equilibrium to maintain or achieve the price near to $1. The supply of the token is controlled by the protocol and that makes it an elastic supply monetary system backed by protocol.

How Ampleforth (AMPL) Works

The AMPL token is not backed by any other assets or commodities like the other stablecoins. The famous stablecoin USDT (Tether) is backed by the USD reserve (there is always controversy whether it is 100% backed or not). The AMPL token is backed by the protocol.

Lets explain how the protocol works:

Rebase

As discussed above the supply of the token is maintained by the protocols. The goal of the protocol is to reach and maintain the price near $1. The rebase process is held at 2:00 AM UTC (7:30 AM IST) every day.

If the price goes above $1.06, the protocol will increase the total supply of the token to brings the price down. It is just like the value of Fiat currencies goes down when they print new money. This is a basic rule of economics if the supply of anything goes up and the demand remains the same then the value of the assets or commodity will go down. AMPL used the same demand-supply equilibrium. This is called a positive rebase.

If the price goes below $0.96, the protocol will reduce the total supply of the token to increase the price. This is called a negative rebase.

The supply contraction and expansion affect every holder of AMPL (whether the coins are held on exchange, wallet, or liquidity pools). This means that the number of tokens on your wallet or exchange will be modified every 24 hours depending on the price.

If the total supply is increased than the number of tokens in your wallet also increases. If the total supply is decreased than the tokens in your wallet also decrease.

Let’s try to understand it with an example (according to AMPL whitepaper):

Positive Rebase example

Assume BOB buys 10 AMPL tokens each of $1, and the demand increase in the next few hours increasing the price to $2. In that case, the rebase protocol will increase the supply to maintain the price. BOB gets 20 AMPL tokens each of $1 (the supply is increased by 2x to bring the price down).

Negative Rebase Example

Assume ALICE buys 10 AMPL tokens each of $1, and the demand decrease in the next few hours decreasing the price to $0.5. In that case, the rebase protocol will decrease the supply to maintain the price. BOB gets 5 AMPL tokens each of $1 (the supply is decreased by 50% to bring the price up).

Reducing or increasing the supply daily for 50% is not sustainable and the token becomes more volatile. To avoid unnecessary overcorrection, the protocol grades supply changes as though they will distribute evenly over the course of 10 days. For example:

• if the exchange rate is 1.5 Amples: 1, the price difference can be offset by increasing each wallet’s balance by 50%.
  
  Grading linearly over 10 days means in this case that the protocol will increase wallet quantities by +50% / 10 on the first day.
• if the exchange rate is 0.5 Amples: 1, this price difference can be offset by decreasing each wallet’s balance by −50%.
  
  Grading linearly over 10 days, in this case, means that the protocol will update wallet quantities by −50% / 10 on day zero.

The rebase is done only once in 24 hours and the protocol will calculate the rebase according to the average volumed priced during the rebase time.

Should You Invest in Ampleforth (AMPL) or Not?

As discussed above the (Ampleforth) AMPL token is designed to be a stablecoin or say maintain its value near $1. But currently, the price is highly volatile on both the up and down side because of the demand and less knowledge of investors.

Some investor just buying Ampleforth (AMPL) because they hear or read about the positive rebase and thinks that their money will grow automatically that will increase (better word pump) the price for a shorter period. The algorithm will continue to release the supply of the token and the supply will be greater than the demand that will pull the price. Now you are thinking about what matter if the prices go down, I have already more tokens now. That’s true for early investors who get into the train before it gets started.

Now takes an example of random crypto investors who bought AMPL because the price is going up and people are shilling about positive rebase. Double profit, free money Yeahhh.

Let say the investor bought at $1.5 and after 2 days the price fell to $0.75 which means he is in 50% loss now. What happens next day is a negative rebase and he loses more tokens (means more money) due to the negative rebase.

The price of the token depends on new investors, so the question is why anyone buys AMPL token at $0.75 and knows there will be a negative rebase the next day?

The price of the AMPL token is $0.85 (at the time of writing 12 August 2020). The price is below $1 for the last 13-14 days. The tokens are daily reduced because of the negative rebase. The algorithm is worked as designed, but the price is not reacting to it. So what will increase the price of the token?

AMPL Price Predication

The AMPL token price is highly volatile and tough to guess what comes next. Investors can learn to ride the waves and make a profit. No one knows when the train stops and how many investors will end up with a loss. The ultimate goal of the algorithm is to stabilize the price of the token near $1 but that is far away now. Please see both sides of the coin before putting a bet.

Conclusion

The token can be bought on a variety of exchanges such as Bitfinex and Kucoin and also using Metamask and purchasing on Uniswap. Investors should do their own research before investing in any product. DeFi hype is the same as ICO hype in 2017-2018 and you can see how many ico projects survive today.