What is Ampleforth?: The Stablecoin With Elastic Supply

• How Does Ampleforth Work? 
• AMPL and FORTH
• How is AMPL Different from Luna/Terra?
• Final Thoughts: What are the Risks of Ampleforth?

Ampleforth is an Ethereum-based software ecosystem that utilizes two types of digital assets, AMPL, a stablecoin, and FORTH, a governance token. Ampleforth doesn’t have a fixed supply for the AMPL token. Instead, the protocol reaches price stability using a rebasing system that modifies the supply based on demand.

Ampleforth uses Chainlink as its blockchain oracle to supply real-time price data and determine if the AMPL supply needs adjustments. Therefore, users who have AMPL in their wallets will always see their balance change every day at 2:00 UTC in response to the current price and economic state of the network.

Ampleforth was built in 2018 by a development team formerly called Fragment Inc., who now has the same name as the protocol. They created Ampleforth in 2018 as a chain-agnostic system, this means the protocol is compatible with various blockchain networks, including layer-2 solutions. By 2021, Ampleforth integrated AMPL with Avalanche to bring an alternative stablecoin to the AVAX ecosystem.

How Does Ampleforth Work? 

Let’s first introduce the three types of stablecoins to understand the Ampleforth system better.

• Fiat-backed or commodity-backed stablecoins, like USDT and USDC, have cash reserves, commodities, and cash equivalents to back their stablecoins. In case of a massive liquidation, both protocols would be able to withdraw those reserves to defend the peg.
• Crypto-backed stablecoins are backed by excess reserves of cryptocurrencies. In other words, they are over-collateralized. For example, the MakerDAO, issuer of the DAI Stablecoin, has an Ethereum reserve that largely exceeds the number of DAI issued.
• Algorithmic stablecoins rely on a two-token mechanism and a pre-programmed supply system to match buyers and sellers. In simpler words, one is a stablecoin, and the other is a cryptocurrency, and the equilibrium between the two is maintained by a smart contract in case of price divergences.

Ampleforth, on the other hand, is a one-of-a-kind in the stablecoin market due to its dynamic rebasing system. Ampleforth’s stablecoin has both an elastic and non-dilutive supply. This means that, as the Ampleforth protocol modifies the AMPL supply, users still own the same amount of stablecoins. The rebasing system adjusts the supply of AMPL every 24 hours to maintain price stability. 

The three stages of the AMPL supply are as follow:

• Expansion: if the price of AMPL is greater than 1 USD, the protocol introduces new AMPL tokens to lower the price.
• Contraction: if the price of AMPL is below 1 USD, the protocol removes AMPL from circulation to help stabilize the price back to 1 USD.
• Equilibrium: 1 AMPL is exactly 1 USD.

Ampleforth targets the 2019 CPI dollar, a pricing pressure metric in the US. The protocol uses the CPI as its target price, which is $1.009. This metric determines if the protocol needs a rebasing process to increase or decrease the AMPL price. In other words, the rebase function, also called the equilibrium threshold, ensures that if AMPL is 5% above or below the price target, then it needs an adjustment.

This percentage is one of the two main parameters of the Ampleforth ecosystem. The second one is the dampening factor, whose main task is to avoid abrupt supply changes with a supply spread of 10 days. For example, if the rebase function increases or decreases by 50%, this percentage would have to be spread over ten days, so a 5% supply increase/decrease from day 1. 

AMPL and FORTH

Ampleforth has two tokens: AMPL and FORTH. Both are ERC-20 tokens designed with different functions. 

AMPL is the unit of account stored in users’ cryptocurrency wallets and decreases or increases based on demand. AMPL also has a wrapped version called WAMPL, which are used to facilitate cross-chain transactions on centralized and decentralized platforms and are redeemable for AMLP tokens. 

FORTH is Ampleforth’s governance token, which has a max supply of 15 million tokens and a circulating supply of 8 million. It’s an inflationary token with an inflation rate of 2% per year. 

Users with FORTH tokens can vote on network parameter changes or submit their own proposals, lend their tokens to a DEX or DeFi platform that requires liquidity —a process called liquidity mining— and manage the DAO treasury in their spending efforts to enhance mechanisms in the elastic supply of AMPL.

The FORTH DAO has a five-step consensus protocol that consists of:

• Discussion: Regarding the DAO governance community and its channels across social media, network changes and suggestions, forums, etc.
  
• Proposals: if an idea has enough support, the person who created the discussion can submit an AIP, Ampleforth Improvement Proposal (AIP), or Configuration Change Proposal (ACCP), which are simply formal documents that clearly outline the proposal for network changes.
• Targeted Discussion: Each proposal has a dedicated forum where users can ask questions about the proposal, resolve pending issues, provide constant feedback, and finally reach off-chain consensus.
• Off-chain Signaling: token holders vote to express sentiment regarding a proposal and its possible outcome if off-chain consensus wasn’t possible during the previous step.
• Technical Development: developing the code, launching it on testnet, and auditing for security.
• Deployment: users vote on-chain on the deployment of new protocol contracts or changing the state of current ones, for example.

Geyser Program

In order to incentivize liquidity providers and accelerate adoption, Ampleforth developed the Geyser program, which allows liquidity providers on Uniswap’s AMPL/ETH pool to stake their tokens and receive additional AMPL.

How is AMPL Different from Luna/Terra?

When it comes to stablecoins that determine their value algorithmically, we must address the elephant in the room: LUNA & Terra (UST). In the case of Ampleforth, it uses three tokens: one is the stablecoin, the other is an inflationary governance token with a fixed supply, and the other is a wrapped version that facilitates cross-chain transfers.

Terra was a stablecoin project that had a stablecoin, UST, and a native inflationary cryptocurrency, LUNA. If UST was trading at $0.90, traders could buy it at that price and then sell it for 1$ of LUNA, shrinking the UST supply and increasing its value. Conversely, when UST traded above $1, they could mint UST by burning LUNA, returning UST to 1$, while also shrinking the LUNA supply and therefore increasing its value. At least theoretically.

When it comes to Ampleforth, the protocol introduces new AMPL tokens to lower the price of AMPL if it is greater than 1 USD, or removes AMPL from circulation to help stabilize the price back to 1 USD if the price is below 1 USD.

AMPL isn’t the first (or likely the last) project to introduce a stablecoin token paired with an inflationary “stabilizer token” —that’s just the nature of algorithmic stablecoins thus far. 

Final Thoughts: What are the Risks of Ampleforth?

Ampleforth has stated that its main interest is to follow “true decentralization” since most stablecoins have to rely on a central bank for their USD deposits. Ampleforth introduces a rebasing system that expands or contracts the supply depending on market demand. 

While Ampleforth has achieved a certain level of stability with this mechanism, it has previously shown signs of weakness. In 2020, speculators decided to trade the supply changes using leverage, causing its price to drop by 20%. As the price was in freefall mode, thousands of investors flooded out of Ampleforth, causing a sharper decline.