DeFi promised a revolution. It hasn’t been delivered yet.

DeFi captivated the world in its early days by introducing a working concept of open, permissionless financial markets. It began as the world’s first financial sector free from the traditional big banks, intermediaries, and overall censorship of traditional finance. But fast-forward to today, and DeFi is stuck between two dominant asset types, both of which carry significant compromises and risks:

• High-volatility assets (ETH, BTC, governance tokens): While decentralized, expose users to wild market swings making them difficult to store value within the medium term.
• Zero-volatility assets (stablecoins): Centralized stablecoins (USDC, USDT) provide near-term price stability but are centrally issued and inflation-prone, reducing their effectiveness for long-term value storage

Decentralized stablecoins (DAI, LUSD) either heavily rely on centralized stablecoins as collateral, inheriting their risks, or compromise on stability due to liquidation mechanics and limited scalability under high demand.

As a result, portfolios today are forced into an extreme case of the classic “barbell” dilemma:

Allocating between hyper-volatile decentralized assets on one end, and inflation-prone or stability-compromised stablecoins on the other, to construct a portfolio comfortable enough to hold.

A mature decentralized economy would evolve beyond speculation; moreover and would evolve beyond anchoring on fiat. This requires a foundation that is decentralized, durable, and untethered to fiat monies.

Enter Low Volatility Assets (LVAs).

Between high-risk crypto assets and zero-volatility stablecoins lies a massive, underserved opportunity: the messy middle. The messy middle is the addressable market of users, institutions, treasuries, and global savers all seeking to outperform inflation while preserving optionality. These users would like to store wealth in some return-generating portfolio; without needing to precisely estimate how much they’ll need to withdraw in the next 1–5 years. In traditional finance, this middle market segment represents over $24 trillion in capital flowing through mediums like money market funds, treasuries, pension funds, and sovereign cash reserves.

Yet DeFi has never built the infrastructure to serve it. LVAs unlock this opportunity.

They introduce a new asset class: decentralized, inflation-resistant, low-volatility assets designed for scalable, sustainable finance rather than extractive speculation. And it all starts with AMPL and SPOT.

Low Volatility Assets (LVAs)

LVAs offer a third market option that eliminates the barbell dilemma: simple, durable, risk-adjusted instruments that offer long-term upside while minimizing near and medium-term downside risks.

Ampleforth pioneers this asset class with SPOT, the first LVA built using AMPL — a breakthrough in algorithmic monetary design that transforms volatility into opportunity through supply elasticity and tranching mechanics.

Understanding AMPL: Volatility Transferred to Supply

AMPL is unlike anything else in crypto. As a protocol-native unit of account, it adjusts its supply algorithmically in response to market conditions to maintain a price target of 1 CPI-adjusted 2019 USD. Each day, AMPL’s supply expands or contracts to maintain purchasing power:

• If demand pushes AMPL above its CPI-adjusted target, the protocol increases supply (a positive rebase).
• The protocol contracts supply if demand drops below the target (a negative rebase).

These pro-rata, non-dilutive adjustments ensure every holder maintains their proportional ownership. If you held 1% of the network before a rebase, you have 1% after (though your token balance will change). This makes AMPL unique: it is uncollateralized, decentralized, and non-dilutive, meaning AMPL captures all growth of LVAs like SPOT built on top of it through a scarce resource: supply ownership.

Introducing SPOT: The World’s First LVA

SPOT is the world’s first fully functioning LVA and store of value built overtop AMPL’s unit of account protocol. It works through a simple, yet powerful mechanism: tranching. When users deposit AMPL into a specialized vault (i.e., the Rotation Vault, see Docs), the protocol splits the AMPL into two new tokens:

• SPOT (senior tranche): absorbs the long-term purchasing power of AMPL while insulating holders against short-term volatility.
• stAMPL (junior tranche): absorbs most of AMPL’s short-term volatility, catering to users who seek exposure to volatility and yield.

By using AMPL as the base layer, AMPL’s underlying volatility and elasticity become productive, creating two new financial derivatives. Consequently, SPOT offers the best traits of AMPL (decentralized, inflation-resistant, permissionless) with a significantly reduced volatility profile without a peg or relying on fiat backing.

Additionally, SPOT features a free-floating price that loosely tracks the price of 1 AMPL, which is inflation-resistant over the long term. However, SPOT’s price also has built-in mechanisms that incentivize it to revert to the mean over time (enrichment/debasement, see Docs), meaning its price allows for short-term volatility but with limited upper and lower bounds. Think of this as a digital version of low-volatility gold.

SPOT’s price is anchored to real-world purchasing power over time (via AMPL) but is not pegged, so it can experience low levels of volatility with short-term demand. LVAs like SPOT that are built on AMPL can serve as a stable, yet decentralized base monetary layer for DeFi, enabling new forms of lending, borrowing, and portfolio construction without the systemic risks associated with existing primitives.

So, harnessing AMPL’s elastic design provides the structural upgrade for a blockchain-native base money DeFi desperately needs to scale globally, with all growth capturable through a single token, AMPL. And, unlike traditional stablecoins that erode due to inflation or volatile crypto assets that demand high collateralization, SPOT unlocks a superior risk-return landscape:

• Transparent Risk & Predictable Stability. No centralized issuer, no peg, no blacklisting risk, no liquidations, and no real time price oracle.
• Enhanced Capital Efficiency. Reduced over-collateralization with scalable, decentralized liquidity.
• Inflation Resistance & Long-Term Value. Assets that retain purchasing power over time.

LVAs like SPOT are not meant to replace existing tools like stablecoins. Instead, they are expected to expand DeFi’s design space. Incorporating AMPL and its derivative LVAs like SPOT, protocols, treasuries, and users can all escape the binary choice between risk and control.

Through AMPL and LVAs, Ampleforth introduces a credible alternative to hyper-volatility and custodial fiat coins. It is the first competent and scalable version of engineered decentralized stability.

Why Do LVAs Matter?

The Problem with Hyper-Volatile Collateral

Crypto-native collateral, generally including assets like ETH, BTC, specific governance tokens, and others, is abundant, decentralized, and liquid. However, it is also dangerously unstable over the long term. Most lending platforms require collateralization rates of over 150% to offset volatility risk. Despite this massive inefficiency in capital usage, liquidations are still extremely common, often triggered by historically minor price drops for crypto. Nevertheless, this capital inefficiency is baked in, significantly limiting the scale and adoption of DeFi overall.

Even MakerDAO, often seen as one of the flagship DeFi reserve banks, relies heavily on volatile collateral, which amplifies systemic risk to its ecosystem during market downturns. Of course, to partially counteract this problem, the MakerDAO community institutes a heavier use of USDC, which unfortunately comes with its own set of risks discussed in the subsection below.

Overall, protocols built on unstable collateral struggle to scale responsibly. Users are either overexposed or overcollateralized, and capital flows, inefficiency, and risk are mispriced.

The Problem with Stablecoins

On the other hand, fiat-backed stablecoins are the most widely used assets in DeFi by far. With a combined market cap of over $130 billion, USDC, USDT, and others underpin most lending, trading, and liquidity within the blockchain economy today.

Now, the problem is that this perceived stability comes at a heavy cost:

• Censorship risk. Centralized stablecoin lenders can and have frozen assets and blacklisted wallet addresses before.
• Regulatory vulnerability. Governments can compel issuers to blacklist, restrict, or devalue assets. With new regulatory clarity expected within the next few years, it is unclear what restrictions will be placed on issuing and using fiat-backed stablecoins.
• Inflation erosion. Pegged to fiat, these assets lose purchasing power over time, failing as long-term stores of value. This value erosion affects every blue-chip protocol treasury and DAO in DeFi today.
• Centralization by design. Decentralized stablecoins like DAI heavily rely on USDC collateral, negating the ethos of providing market participants with truly decentralized money. There have been attempts by the market to avoid using centralized stables for collateral, like Liquity’s LUSD, but these designs struggle to maintain reliable stability, frequently exposing users to liquidation risks and scalability constraints.

DeFi has become addicted to convenience at the cost of sovereignty. By outsourcing stability to off-chain custodians, the ecosystem has opened itself to the risks it was designed to avoid. In other words, the money that powers ecosystems and backs the majority of liquidity pools is completely controlled and issued by traditional banks and lenders, completely negating the entire purpose of establishing decentralized financial protocols in the first place.

The Zero-Sum Trap

The Barbell Dilemma plaguing DeFi has enabled a deeply extractive economic model to dominate. Most DeFi tokens are launched at aggressive valuations, often with minimal product-market fit, and sold to retail users under the guise of decentralization and innovation.

Unfortunately, it’s a standard playbook, especially by newer DeFi protocols attempting to raise significant amounts of capital to ensure a longer runway for ongoing development:

• Venture capitalists and early insiders receive tokens at deep discounts
• Retail users and communities buy in at inflated prices, serving as exit liquidity for VCs looking to recoup their ROI
• Emission-heavy incentive programs dilute holders under the pretense of “growth.”

In summary, the factors above create the zero-sum trap, where early movers extract value from later participants.

These later participants absorb most of the downside, enabled by an ecosystem built on volatile assets or inflationary stablecoins. If most of these blue-chip tokens were investment vehicles to raise money for protocol development, that would be one thing. The problem is, these tokens almost always take on multiple utilities to avoid any relations with typical securities — they underpin governance, lending markets, gas fees, and more, meaning that users cannot easily opt out of the zero-sum trap.

Without a durable, non-extractive alternative, users choose between speculation and stagnation. So, DeFi has become addicted to convenience at the cost of sovereignty and sustainability.

Economic Rationale & Use Cases

LVAs, beginning with SPOT, finally introduce real stability for storing wealth, reinforcing treasuries, and mitigating capital flight during market contractionary periods. This is possible because LVAs like SPOT are fully decentralized, inflation-resistant, and highly durable stores of value. Without transparently stable decentralized assets (in the true sense), DeFi remains structurally limited in who it can serve, how capital flows, and what financial outcomes are possible.

LVAs are a new financial class that can maintain low volatility without sacrificing sovereignty, resist inflation without requiring hard collateral, and even offer real yield.

Why does this matter?

It enables the creation of a better risk-adjusted return profile on-chain. With the introduction of SPOT and LVAs, investors today can choose between:

• Fiat-backed stablecoins offer 0% APY and zero volatility but are inflationary, censorable, and centrally controlled.
• Volatile DeFi tokens might offer high returns (100–300% returns) but also have enormous price swings and unsustainable emissions.
• LVAs like SPOT target 5–10% volatility with a potential 20–40% APY driven by real yield and AMPL’s long-term expansion.

This third option changes the game.

LVAs allow DeFi participants to opt into a real yield opportunity that is stable, transparent, and durable. Thus, SPOT holders benefit from both:

• Rebase-driven network growth (AMPL supply expansions),
• Insulation from volatility via tranching.

Yield from LVAs is a type of structural yield (not subsidized or inflationary), and it grows alongside adoption, not against it. In other words, this is a systemic upgrade to DeFi’s foundation because LVAs allow us to rebuild stability from first principles: no banks, no collateral, no pegs. Rather than fighting volatility with centralized fiat (defeating the purpose of DeFi), we now have a system and asset class that:

• Transforms volatility into value
• Separates stability from censorship
• Aligns network growth with user benefit

Use Case Example: Optimized Portfolio Allocation

Imagine a DAO treasury managing $10M. Instead of holding 80% USDC and 20% ETH, they restructure:

• 40% SPOT
• 30% ETH
• 20% AMPL (or stAMPL)
• 10% USDC (for operational flexibility)

This portfolio:

• Reduces exposure to censorship risk
• Gains upside from network growth (via AMPL and rebases)
• Maintains a stable, inflation-resistant reserve (via SPOT)

Over time, this model preserves more real value over the long term while staying fully on-chain.

Who Benefits from LVAs?

Builders and Protocols

DeFi builders, liquidity providers, and DAO treasuries are often forced to play defense, balancing between unstable collateral and centralized stablecoins. The fragility of this dynamic limits innovation and adoption. Smart contracts grow complex with buffers and circuit breakers just to handle volatility. Treasuries silently bleed value to fiat inflation, yet still depend on stablecoins. LPs, meanwhile, face impermanent loss and are pushed toward riskier yields to compensate.

LVAs like SPOT flip this dynamic.

Protocols gain a decentralized store of value that is stable enough for contracts, free from pegs, banks, or custodians. Treasuries unlock a transparent, inflation-resistant reserve. LPs earn superior fees thanks to SPOT’s natural 5–10% volatility, creating more sustainable yield opportunities than static stablecoins ever could.

Thus, SPOT is an upgraded asset for DeFi’s base layer builders.

Capital Allocators and End Users

Institutions, family offices, and global savers represent a multi-trillion-dollar market that crypto has yet to reach fully. These capital allocators want exposure to crypto-native yield without the downside risks of volatility or the constraints of fiat-backed stablecoins. Retail users face a similar challenge: protecting their savings against inflation while avoiding the vulnerabilities of centralized assets.

LVAs like SPOT are the missing bridge.

SPOT provides a blockchain-native savings vehicle that is permissionless, self-custodied, and inflation-indexed. It behaves like a crypto-native equivalent of treasuries: low-volatility, yield-bearing, and stable in real terms.

• For institutions, it unlocks the ability to allocate capital on-chain with confidence.
• For everyday users, it offers a way to build wealth without sacrificing sovereignty.

Market Size and LVA Opportunity

The economic opportunity for LVAs extends far beyond DeFi’s current user base. As we established above, the addressable market that is still off-chain represents as much, if not more, of an opportunity for future growth than the existing users and developers currently on-chain (i.e., LVAs are for everyone, on or off-chain).

What’s at stake is onboarding an entirely new class of participants: institutions, sovereign allocators, and real-world capital managers who have been priced out or structurally excluded from crypto due to its volatility and fragmentation. AMPL unlocks this opportunity as the monetary foundation for the entire category of LVAs. The first of these, SPOT, demonstrates how AMPL can be transformed into a scalable, stable, and yield-generating instrument suited for long-term capital allocators.

Each SPOT minted requires roughly 3.3 AMPL to enter the tranching system (due to the minting ratio, see Docs). So, growing SPOT’s footprint has a multiplied impact on AMPL adoption, supply lock-up, and network value. Every dollar of LVA demand effectively multiplies AMPL’s role as the base-layer asset of decentralized finance.

How can we value this market opportunity?

A Multi-Trillion Dollar Demand That DeFi Hasn’t Captured

DeFi has already proven the viability of open, permissionless financial infrastructure. It hasn’t yet delivered a reliable foundation for long-term capital allocation. This is where LVAs like SPOT become essential. They offer a new access point to a market that remains largely untouched.

Across traditional finance, trillions of dollars flow into instruments prioritizing capital preservation, yield, and risk-adjusted performance. These vehicles, from money markets to sovereign debt, are the backbone of global portfolio construction.

The tens of trillions in value within these categories are not speculation-seeking or risk-on capital, which is why crypto has not penetrated most of these market segments. Ampleforth, using SPOT and LVAs, can finally change that narrative. Instead of creating infrastructure to chase meme coins or triple-digit APYs, Ampleforth is building the infrastructure rails through LVAs to onboard tens of trillions in sustainable, mature capital.

LVAs like SPOT are built to appeal to these allocators without sacrificing the ethos of decentralization and permissionless finance originally promised by DeFi. They combine the stability of traditional fixed-income instruments with the composability, transparency, and sovereignty of crypto.

Even a 1–2% penetration of this market, routed through SPOT and future LVAs, could translate into tens of billions of additional AMPL demand due to the tranching ratio alone.

Put simply:

• SPOT = AMPL usage at scale
• AMPL = direct exposure to the entire LVA market growth
• More SPOT demand = more AMPL locked = more AMPL value accrual

This dynamic is what sets Ampleforth apart. AMPL is the monetary unit of account input for SPOT. As DAOs, protocols, and institutional allocators adopt SPOT or similar instruments, they adopt AMPL as the base-layer money behind these assets. Thus, AMPL holders benefit from every SPOT token minted and every additional user onboarded into the system.

How could LVAs like SPOT truly penetrate these markets? Because LVAs offer asymmetric utility across multiple layers of the financial stack:

• Reserve asset: For DAOs, protocols, and treasuries seeking stability and longevity
• Denomination unit: For smart contracts requiring stability without centralization
• Liquidity pair: For LPs optimizing yield with minimal impermanent loss
• Savings instrument: For retail and institutional preservation of purchasing power

We believe LVAs like SPOT have the potential and technical structure to become a standard store of value across the entire DeFi sector that not only captures value itself but drives value to the rest of the space by reinforcing treasuries, reducing systemic risk, and elevating the competitiveness of liquidity pools without introducing extreme amounts of volatility or artificial incentives. As adoption scales, LVAs may function much like DeFi’s T-bill.

By offering a credible on-chain money equivalent, they unlock the infrastructure for a broader, more mature financial system:

• One that invites real-world capital
• One that is censorship-resistant by default
• One that grows without relying on artificial pegs or extractive models

Ampleforth’s mission is not to replace stablecoins or compete with volatility — it is to fill the missing middle that represents a market opportunity in the tens of trillions. Doing so opens the door for the next generation of capital to participate and build in DeFi.

Roadmap and Execution Plan

Successfully capturing even a fraction of the multi-trillion-dollar opportunity demands precision, patience, and strategy. That is precisely what the Ampleforth ecosystem is set to deliver. Our roadmap outlines a deliberate, phased approach to defining, scaling, and ultimately cementing LVAs as a recognized and indispensable category of money for DeFi. LVAs are a structural upgrade for DeFi, but real adoption takes time. It needs to be intentional, measurable, and rolled out in phases so the market can fully absorb its value.

Here’s a look at where Ampleforth is headed in 2025 and beyond:

Phase I — Establishing the LVA Category

Ampleforth’s first phase is focused on education, positioning, and network seeding. The priority is establishing SPOT as the first mover in the LVA market and making the low volatility > no volatility (low vol > no vol) tradeoff widely understood.

Phase II — Becoming DeFi’s Best Collateral

With the LVA market established, Phase II shifts toward utility, collateralization, and yield flow. We will implement strategies to embed LVAs (and SPOT) within DeFi’s economic systems. This may include expanding SPOT’s footprint across money markets, yield platforms, and AMMs, and targeting treasury adoption through other protocols.

Phase III — The Flywheel

The third and final phase will cement Ampleforth as a foundational layer for DeFi, bridging the gap between hyper-volatile cryptocurrencies and zero-volatility stablecoins. Once LVA adoption grows, a self-sustaining cycle naturally emerges from the market:

1. Protocol adoption leads to treasury inflows
2. Treasuries holding SPOT strengthen liquidity and resilience.
3. More profound usage increases AMPL network expansion.
4. Expansion fuels rebase-driven yield and long-term value.
5. Yield attracts more demand, reinforcing the cycle.

Once the above cycle is established, SPOT (and LVAs) will be a globally accepted asset class offering return-generating tools for hedge funds, protocols, and individual investors. Ampleforth’s long-term vision loops back to its original purpose: to build decentralized, algorithmic money that can serve anyone, anywhere.

• AMPL becomes the unit of account for the crypto-native economy
• SPOT becomes a globally accepted demand deposit alternative
• Both operate free of central banks, custodians, or policy discretion

Conclusion

LVAs can mark a breakaway point for DeFi that sees it truly scale to world adoption status. This asset class unlocks a new growth wheel for the entire DeFi industry, combining stability with sovereignty, yield with resilience, and growth with credibility.

Ampleforth is not speculating on this future. We are building it.

SPOT is live, liquid, and growing. The foundational mechanics are proven. The roadmap is active. And the opportunity is enormous. This vision is about creating a new monetary primitive that enables DAOs to build enduring treasuries, protocols to access decentralized collateral, investors to earn structural yield, and savers worldwide to preserve value without relying on banks.

We are not here to chase trends. We are here to define the next standard of value in crypto.

The Ampleforth Vision: LVAs — A New Asset Class to Outperform Markets in 2025 was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

We often hear about assets designed for short-term liquidity or long-term growth in finance. But what about the space in between? Fund managers or even high-net-worth individuals are challenged with the question of where to park capital for a medium-term period.

Short-term assets, like cash or savings accounts, are great for immediate needs — they’re stable, liquid, and easy to access. However, inflation eats away at their value over time, making them a poor choice for preserving wealth. For example, the U.S. dollar lost over 20% of its purchasing power in the last decade alone.

On the other hand, long-term assets, like stocks, real estate, or cryptocurrencies, can grow significantly over many years. However, these assets are often highly volatile or illiquid, meaning they may not be reliable if you need to access your funds in the short-to-medium term.

So, what happens if you need to store your wealth for 1 to 5 years — long enough to worry about inflation but too short to ride out the ups and downs of volatile markets?

Many investors turn to a barbell strategy, splitting their assets into two distinct categories. On one side, they hold low-risk, short-term assets designed for immediate liquidity and safety, such as cash or government bonds. On the other side, they invest in high-growth, long-term assets like stocks or real estate, which are intended to remain untouched for 5 to 15 years to maximize their potential.

While this strategy can help manage risk and reward, the problem arises when market conditions shift unexpectedly. In such cases, the “safe” side may no longer offer enough protection, forcing investors to draw from their long-term capital — assets meant to stay untouched, further exposing them to volatility at the worst possible time.

This is where most financial tools fall short, leaving a gap between short-term liquidity and long-term growth. It’s a tricky situation, where cash and high-growth investments must provide the right balance of security and value retention.

This is the “messy middle” that Evan Kuo, our co-founder describes in a recent interview. The messy middle is the mid-term gap where most financial assets struggle to provide reliable, stable performance.

The Messy Middle Problem

Fund managers and high-value individuals constantly face a difficult balancing act when managing capital that needs to stay accessible while retaining its value.

The financial industry has long recognized this challenge, which is why a range of investment vehicles — such as hedge funds, private equity funds, and other alternative assets — have been designed to specifically address the “messy middle.” These vehicles aim to strike a balance between short-term liquidity and long-term growth by employing strategies tailored to offer solid returns without excessive risk.

Although these funds follow different approaches, the underlying objective is often the same: delivering consistent returns while controlling volatility. For instance, many of these vehicles target a 20% annual rate of return (ARR) while managing downside risk to protect their investors during market downturns.

This focus on low downside deviation means investors experience fewer drastic drops in value, which is critical for those seeking to preserve and grow wealth in the medium term without being exposed to the severe price fluctuations seen in more volatile assets. However, even with these strategies in place, the “messy middle” remains a challenging space.

Traditional short-term assets like savings accounts or bonds may protect against volatility, but inflation steadily erodes their value. This problem is magnified for large institutional investors, pension funds, or high-net-worth individuals who cannot afford to have their capital lose ground in the medium term. On the other hand, long-term assets like stocks or cryptocurrencies present significant risks, particularly in the event of severe market downturns.

Bitcoin is a prime example of this dilemma. While it’s proven to be a strong long-term investment, its 4-year cycle of boom and bust makes it unreliable for medium-term capital preservation.

As illustrated in the chart above, Bitcoin has experienced dramatic price swings over the years. In each cycle, Bitcoin reaches a high, only to experience significant pullbacks — often losing up to 80% of its value before recovering again in the next cycle. These long periods of strong price fluctuations and deep downturns represent the messy middle.

In the short term, Bitcoin’s volatility poses a major risk to preserving value. Although Bitcoin eventually recovers, this pattern of intense price fluctuations makes it an unstable choice for investors who need to store wealth for 1 to 5 years. The cycles reflect Bitcoin’s strength over a long horizon, but for those managing mid-term investments, the volatility during downturn periods makes it an unreliable option.

Commodities like gold, oil, and agricultural products are commonly used to hedge against inflation because they retain intrinsic value as the purchasing power of fiat currencies declines. Gold, for example, rises in value during inflationary periods as a stable store of wealth, while oil and industrial metals see increased demand due to their essential roles in the economy, making them effective inflation hedges​.

However, their volatility and absence of yield make them an inadequate solution for addressing the messy middle. Investors in this space need assets that are both stable and accessible, without the high transaction costs and risks associated with commodities.

Traditional financial tools fail to provide a solution. Investors and firms are stuck between short-term options that lose value to inflation, and long-term growth assets like Bitcoin that come with significant liquidity risks during periods of downturn.

In DeFi, the messy middle is particularly challenging due to the limited range of assets available to maintain stability. Stablecoins, while useful for transactions, lose purchasing power over time due to inflation, while volatile assets like Bitcoin or Ethereum are too risky to hold given their price fluctuations.

This leaves DeFi protocols with few options to reliably shore up reserves, exposing them to potential capital loss or liquidation. Solving the messy middle requires an asset that’s stable enough to avoid sudden drops, yet durable enough to resist inflation.

Enter low-volatility commodity money (LVCM), like SPOT, which aims to solve this problem by providing a stable alternative without sacrificing decentralization or inflation resistance.

Solving The Conundrum

LVCMs are a type of money designed to stay stable over time, avoiding both inflation (like the U.S. dollar) and extreme price swings (like Bitcoin or Ethereum). They provide a middle-ground solution for medium-term savings or spending.

The key advantage of LVCMs is their ability to reduce the volatility of assets like Ethereum while keeping some growth potential. By compressing the volatility — say, by a factor of five — you get a more stable version of Ethereum, which is safer for storing wealth over 1–5 years and helps address the messy middle problem.

SPOT achieves this stability by using AMPL (Ampleforth) as its underlying collateral and restructuring the volatility of AMPL into two distinct derivative assets:

• SPOT: A low-volatility derivative, providing a stable asset that is ideal for preserving wealth in the medium term.
• stAMPL: A high-volatility derivative, for those seeking more amplified exposure to AMPL’s price movements.

The core innovation behind Spot lies in its use of tranching to manage risk. By splitting AMPL’s volatility into two tranches — SPOT (the senior tranche) and stAMPL (the junior tranche) — it effectively minimizes the downside risk for holders of the senior tranche, making it a low-volatility asset that can withstand market fluctuations.

This separation of risk allows SPOT to provide a safer, more reliable option for wealth preservation than traditional volatile assets.

Inflation and Censorship Resistant

SPOT serves as a decentralized alternative to traditional stablecoins like USDT or USDC, which are tied to inflationary fiat currencies and controlled by centralized entities.

It achieves this by utilizing AMPL (Ampleforth) as its underlying collateral. AMPL itself is unique in that it automatically adjusts its supply daily to maintain price stability relative to a target based on the Consumer Price Index (CPI), which helps SPOT resist inflation​.

This inflation-resistant structure makes it an effective hedge against inflation, offering decentralized stability for those looking to store wealth securely without fear of devaluation whenever governments increase the money supply.

Additionally, SPOT’s transparent, on-chain reserves differentiate it from centralized stablecoins that rely on fiat reserves held by institutions. Since SPOT is fully decentralized, users are not reliant on any central authority to maintain its stability, reinforcing the core ethos of decentralized finance — creating systems that operate without centralized control.

Capital Efficiency in DeFi

One of SPOT’s most significant advantages is its ability to improve capital efficiency in DeFi, where high-volatility assets like Bitcoin (BTC) and Ethereum (ETH) require over-collateralization to mitigate the risks associated with price fluctuations.

For instance, platforms often require users to lock up 150% or more of the value they wish to borrow, in case the asset’s value drops sharply. This over-collateralization significantly reduces the efficient use of capital​

SPOT’s unique approach to capital efficiency comes from its ability to transfer volatility and risk away from itself to its junior derivative, stAMPL. This design allows SPOT to maintain a free-floating price without the need for price pegs or heavy over-collateralization, which is typically required by more volatile assets.

Traditional DeFi systems often rely on intricate stabilization mechanisms that can falter during periods of high demand or volatility. SPOT, on the other hand, scales naturally with market demand due to its simple tranching system. This allows it to serve the growing needs of the DeFi ecosystem without requiring complex mechanisms or margin-leverage adjustments. This results in more flexible and efficient capital allocation, allowing markets using SPOT to generate competitive yields with less risk.

Over the medium to long term, the combination of reduced liquidation pressure and greater stability makes SPOT a more reliable asset for capital efficiency. As a result, protocols using SPOT can offer more consistent returns and better capital optimization, positioning them to outperform volatile, high-risk assets like BTC and ETH in terms of yield and long-term viability.

Additionally, Spot’s design allows it to scale with market demand without relying on margin-leverage or complex mechanisms that can be prone to failure. As DeFi grows, the demand for stable and decentralized assets will increase, and Spot’s limitless scalability makes it a flexible tool that can adapt to this expanding ecosystem.

Consensus

In a world where financial assets often fall short of balancing security and growth, SPOT offers a breakthrough solution to the messy middle problem. By combining the stability of low-volatility collateral with the resilience of decentralized finance, SPOT empowers users to preserve their wealth without sacrificing flexibility or facing the risks of inflation.

As DeFi continues to evolve, assets like SPOT will play a crucial role in fostering a more efficient and stable financial ecosystem, ensuring that users have access to innovative tools that meet their medium-term needs with confidence.

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Surviving the Messy Middle in Wealth Preservation was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

We’re excited to introduce a new type of liquidity pair on Aerodrome. SPOT is a low-volatility asset that has some unique properties. SPOT is the very first of its kind—and in this post we’d like to discuss the benefits of pairing SPOT with USDC to provide liquidity on Aerodrome.

Providing liquidity on stablecoin pairs is a popular way to generate yield in decentralized finance today due to:

• Low Downside Risk
• Real Yield

But what does it mean to provide liquidity for a low volatility pair?

Low Volatility is not the same as No Volatility

SPOT is a low-volatility commodity money. It’s durable, decentralized, and inflation resistant, like a commodity money, but less volatile. Most importantly, SPOT is a mean-reverting asset — and a derivative of AMPL.

Some quick context on AMPL

AMPL, launched in 2019, by design has a mean-reverting price around its target: the CPI-adjusted 2019. It is a price stable but supply volatile cryptocurrency, the details of which are best covered elsewhere. What matters is that over time, it has been demonstrated that the price of AMPL returns to target, even through extreme market conditions.

This is AMPL’s historical price distribution:

Now that we have some context on AMPL, onto SPOT

SPOT is a derivative of AMPL that broadly shares AMPL’s price distribution, but is shielded from AMPL’s supply volatility.

Summary of Benefits

The SPOT/USDC DEX pool is similar to a stablecoin pair pool and carries similar benefits in the sense that:

• SPOT is a mean-reverting asset and thus has significantly lower downside risk than typical cryptocurrencies.

However, because SPOT has naturally higher volatility than a stablecoin:

• SPOT pools have the potential to magnify real yields by inviting much larger trade volumes (from arbitrage) on decentralized exchanges.

Links to Resources

To provide liquidity, vote for gauge emissions, and learn more see the following links:

• LP into the SPOT/USDC pool: [link to pool]
• VOTE on the SPOT/USDC gauge: [link to vote gauge]
• LEARN more about the SPOT protocol: [link to spot primer]

Thanks for reading — we’re thrilled to be building on BASE!
Team SPOT

The SPOT/USDC Pair on Aerodrome was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

“There is no such thing as free lunch” — Milton Friedman

The SPOT solution is not without compromise. It is rather the product of many painstakingly deliberate compromises.

Although far more stable than typical cryptocurrencies, SPOT’s design is ultimately one that willingly sacrifices near-term stability—a feature well-served by fiat currencies today—for long-term stability and durability, features currently underserved by fiat currencies. In this sense it’s the asset that is missing from today’s bigger picture.

Today’s fiat monies operate by sovereign mandate. That is to say, a government can require its currency’s use—at the very least for paying taxes. This sort of monopoly creates an irresistible temptation to borrow against future tax revenues. The reasoning goes something like this:

People have to pay taxes using our currency. If we print money using debt borrowed against future tax revenues to stimulate growth now, we’ll be able to generate more tax revenues in the future and pay off this debt later.

Which inevitably leads to downstream inflation—even in the face of markets trending upwards over time. And no, it doesn’t appear as though we’re paying off this debt.

That’s how we, the crypto community, got here; by wondering whether an entirely market supported money can be created that doesn’t have this problem of unbounded inflation.

But any solution aiming to serve as a “better alternative” to fiat, would need to be reasonably stable near-term; and there’s a cost to stability.

So what is the cost of stability and how do we create a long-lived system that incentivizes markets to bear this cost?

The Cost of Stability

In the case of SPOT, the cost of stability is very transparently born by rotation rewards. The protocol works by reorganizing the volatility of its collateral asset (AMPL) into low-volatility (SPOT) and high-volatility (stAMPL) derivatives.

Underneath the hood, these perpetual derivatives are constructed from very simple fixed-term derivatives, the detailed mechanics of which can be explored in the official docs. For this post, just know that:

1. These fixed term tranches automatically mature into raw AMPL every 28 days.
2. When all the tranches in SPOT’s collateral set are fresh (ahead of expiry) the token is stable.
3. When all the tranches in SPOT’s collateral set are mature (after expiry) the token is as volatile as AMPL.
4. The protocol incentivizes rotation of maturing tranches out, in exchange for fresh tranches in through rotation rewards.

This setup is nice in the sense that, even in the worst case where rotation incentives fail, the system enters an entirely non-catastrophic state.

Still, we want the system to be freshly collateralized for a maximum distribution of time—which is why SPOT v2 has dynamic rotation fees.

Dynamic Rotation Fee

Broadly the concept of a dynamic rotation fee recognizes there are times when:

1. You are willing to pay for leverage
2. You should get paid for taking leverage
3. You should be able to take leverage for free

This is not unlike the concept of funding rates in traditional markets where sometimes folks pay a fee for going long, sometimes receive a fee for going long, and in a perfectly balanced scenario there are no fees.

In our system, these fees serve to gradually balance the demand for stability and volatility—and capital flows from holders of one asset to the other in a non-extractive way.

• Enrichment: When there’s more demand for volatility than stability a rotation fee is paid by stakers in the stAMPL rotation vault. This fee accrues to SPOT holders.
• Debasement: When there’s more demand for stability than volatility a rotation reward is paid to stakers in the stAMPL rotation vault.
• Equilibrium: When demand for stability and volatility are balanced, there’s no fee.

Lastly the maximum rate of enrichment (20%) and debasement (10%) are enforced by a simple continuous function. For more detail see the official docs.

Enrichment / Debasement over Time

So we’ve established now that SPOT will enrich or debase based on the balance of demand for stability and leverage respectively.

But what might this look like over long time horizons?

Typically, there’s more demand for leverage when markets are going up and less when markets are going down. And though it’s impossible to predict the future, we can at least look at the past.

If we suspend disbelief by imagining that crypto markets are generally bullish when equities are bullish, and generally bearish when equities are bearish, we can look at the historical distribution of up vs down years as a starting point.

When we lay the effect of enrichment and debasement over historical year-over-year S&P changes (normalizing for the fact that rotation rewards are capped at +40% enrichment and -10% debasement) we get this:

There’s some hand-waiving here, but my point is to say that an asset:

1. Sufficiently low in near-term volatility to use as an alternative to fiat
2. That directionally follows broader market trends

Would be a much better alternative to fiat in the sense that fiat simply goes monotonically down; whether broader markets are up or not. Plus it would be entirely market supported.

It’s as though a low-volatility gold (or other synthetic commodity-money) is the asset we never knew we always needed.

thinkl → buidl → hodl,
Evan Kuo

twitter.com/evankuo
spot.cash
ampleforth.org

SPOT v2 — The cost of stability was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Low volatility gold — the asset that’s missing

“Genius hits a target no one else can see.” — Schopenhauer

So what do we mean by the asset that’s missing? Plainly, we mean an asset that integrates the best of fiat monies (like the dollar) and commodity-monies (like gold or Bitcoin).

But which qualities do we strive to keep from one and borrow from the other? Asked another way, “What are the virtues and vices of fiat and commodity monies?”

The short answer is fiat monies are great for near-term stability but they lose value to inflation, are highly censorable—and being directly tied to the rise and fall of sovereign states, they’re not durable.

Commodity monies on the other hand, are highly durable, uncensorable, and absolutely scarce (ie: we can’t arbitrarily increase the supply of gold or Bitcoin causing price inflation). They’re just not stable enough for commerce.

The asset that’s missing isn’t a digital dollar, we already have dollars. And as much as we love Bitcoin it can’t be a digital gold, we already have gold. We said missing remember? It’s something:

• << Much less inflation-prone than fiat monies
• >> Much more stable than commodity monies
• == Similarly durable / uncensorable to commodity monies

What’s being described here, is akin to a really low-volatility gold.

This may sound backwards, but bear with me. Stating the obvious, the dollar’s purchasing power has declined profoundly over time against gold; there’s a clear winner.

But the fact is, over shorter time horizons gold’s swings are just too big for use as an alternative demand deposit that supports commerce.

US Dollars are used predominantly globally for both debt and trade invoicing

Today, if you’re an emerging market importer with a trade agreement in place to purchase $100M of wheat per year, you really have to keep a lot of USD around to honor that agreement regardless of whether you’re buying from a US exporter. Trade invoices are predominantly denominated in dollars.

• Invoicing of International Trade: An overwhelming fraction of international trade is invoiced and settled in dollars. The dollar’s share as an invoicing currency for imported goods is ~4.7. times the share of US goods in imports¹.

This gives rise to a global mass demand for safe dollar deposits (held in order to honor invoices) which in turn makes it cheaper to borrow in USD. For this reason, debt is also predominantly denominated in dollars.

• Bank Funding: According to Bank for International Settlements (BIS) locational banking statistics, 62% of the foreign currency local liabilities of banks are denominated in dollars. Dollar liabilities of non-U.S. banks are on the order of $10 trillion, and are roughly comparable in magnitude to those of U.S. banks².

Businesses, governments, and individuals across the world borrow and invoice in USD, even if their revenues are booked in a local currency. They simply take on the risk of losing value to dollar-appreciation — and don’t really have a choice.

This sort of denomination is deeply entrenched, well studied, and self-reinforcing. As such, the dollar’s dominance as a global unit of account will not be challenged anytime soon.

Some alternative demand deposit (or store of value checking-like account) might be able to compete, but even outside the US, any alternative asset would need to be less inflation-prone than the USD, censorship resistant—and reasonably stable.

What would a low-volatility commodity-money look like?

So what if a commodity-money like gold or Bitcoin was made significantly less volatile?

This is worth asking now because it has recently been made clear this sort of low volatility commodity money can be extracted durably and scalably from existing commodity monies by reorganizing a medium volatility asset into high and low volatility perpetual derivatives.

Here’s what 1/10th gold volatility looks like compared to inflation:

And this is what our hypothetical low-volatility gold’s inflation-adjusted price plotted against USD purchasing power looks like:

If such an asset’s purchasing power curve were to resemble what’s pictured above, it could in theory be held as an alternative safe asset to dollar demand deposits filling a massive void in the global market—the benefit of which would be diversification from the risks of global dollar dependence.

Now you might be wondering: Why make commodity-monies more like fiat and not the other way around?

The answer: because one is less than three.

Taking a commodity-money which nearly fits the bill and tweaking one thing to make it more stable is far more reasonable and achievable than modifying fiat-money—which merely appears to nearly fit the bill—three ways to become inflation-resistant, uncensorable, and durable.

The blockchain technology newly enables the creation of commodity-monies and significantly lowers the barrier to entry for creating simple banks. This is a gift, we should take it.

The same technology simply does not enable the creation of fiat monies which at their core work on the assumption that adoption can be forced by the state—are fundamentally inflation-prone, and don’t freely trade on markets. It’s a red herring, we should avoid it.

In the end, I would imagine that your future global citizen has a portfolio with three types of money. In one pocket he has gold, Bitcoin, and other volatile stores of value that secure him for the long term, say 5–15 years. In another pocket he has a small amount of USD, which he uses for settling his outstanding obligations. And in the third pocket he has our missing asset, low-volatility commodity money. He holds enough such that he can draw it down in 1–5 years to pay rent, medical expenses and the like. It is insulated from inflation, but easily convertible to USD whenever he needs to refill the second pocket.

Evan Kuo

twitter.com/evankuo
spot.cash
ampleforth.org

[1]: Gopinath, Stein. (2018). Banking, Trade, and the Making of a Dominant Currency. National Bureau of Economic Research
https://www.nber.org/system/files/working_papers/w24485/w24485.pdf

[2]: Ivashina, Scharfstein, Stein. (2014) Dollar funding and the lending behavior of global banks. Quarterly Journey of Economics
https://academic.oup.com/qje/article-abstract/130/3/1241/1934119?redirectedFrom=fulltext

The asset that’s missing was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Suggesting that we think in terms of perpetuals rather than stables. A bounded spectrum of outcomes for SPOT

Flatcoin, stablecoin, is there really any difference? Surely this new “term of art” used to describe the next generation of stable cryptocurrencies is as vague as its predecessor.

Best I can tell, the name change is a welcome rebrand whose proliferation delimits a transition in public thinking. It is a maturation of values happening around a period in time. Specifically, two widely observed (and viscerally experienced) things occurred in the past 24 months that have changed the market, irrevocably:

1. Runaway USD Inflation
2. The Terra/Luna Collapse and Contagion

In 2018, when we first expressed concern for long-run fiat inflation, considering it a key problem to be solved in the field of alternative money, the very mention of inflation would have people looking at me like a baby boomer — out of touch with modern reality. Now, having lived through it, everybody cares about inflation. Simply reproducing the dollar no longer qualifies as innovation.

Similarly, when we started talking about peg-breaking, bank runs, cascading liquidations, bad coupon debt, death spiral minting, and bailouts — people responded with: “We don’t know what we don’t know. Money is just a matter of belief” or something to this effect. Now, having lived through the Terra/Luna fallout, everybody cares about durability. Stable asset designs that force markets to choose between bailout or murder-suicide, no longer qualify as innovations.

Let’s Be More Precise Than “Flatcoin”

To be clear, I consider this collective up-leveling of values to be much welcomed progress. Given what the space has been through, markets should be concerned about peg-breaking, bank-runs, cascading-liquidations, death-spiral minting, transparency, etc.

Yet iterating through an ever-growing emergency checklist of catastrophic failure criteria — anchored around bad designs that have very little in common with one another — doesn’t quite usher in peace of mind.

How do we know there isn’t some new boogie man out there that just hasn’t made the list yet?

Bringing us to where we are now. The checklist of failure criteria has been applied to SPOT and it passes — not because the asset was designed around avoiding specific failure criteria elucidated by an orderless array of bad designs — but because it takes a fundamentally different approach.

My hope is that by communicating this difference in approach, folks will come to see that SPOT’s design invalidates not only the few “checklist” concerns we know of, but also the many that have yet to be discovered.

SPOT is a Low Volatility Derivative of AMPL

The SPOT protocol works by splitting a medium volatility asset (AMPL) into a high-volatility derivative (stAMPL) and a low-volatility derivative (SPOT).

There are no pegs. And for every quantum of stability in the SPOT system there is a transparent amount of volatility that affords it. Nothing is obfuscated, hand-waived, or ignored. In other words, all risk in the system can be seen and priced.

Both SPOT and stAMPL are one-directional, proportional claims on baskets of collateral — just as a UNI-V2 LP token is a one-directional proportional claim on a basket of two assets.

The value of SPOT and stAMPL is determined by the redeemable value of its collateral — just as the value of a UNI-V2 LP token is determined by the redeemable value of its collateral.

It has a Bounded Range of Volatilities

Both derivatives, SPOT and stAMPL, are collateralized by baskets of fixed-term AMPL tranches, the detailed mechanics of which are best left to the official docs. For this post, just know that:

1. Tranched AMPL matures into raw AMPL every 28 days.
2. There exists a system of incentives that promotes rotation of maturing tranches (that are nearing expiration) out, in exchange for newly minted fresh tranches in.

In the typical state, where all the tranches in SPOT’s collateral set are fresh, the token is stable. But in the most extreme scenario, where all the tranches in SPOT’s collateral set have matured, SPOT is precisely as volatile as AMPL.

Similarly, when all the tranches in stAMPL’s collateral set are fresh, the stAMPL token is ~1.5x as volatile as AMPL. And when all the tranches in stAMPL’s collateral are mature, stAMPL is precisely as volatile as AMPL.

Moreover, the system can go from being collateralized entirely by fresh tranches, to all mature tranches, and vice-versa. Just as tranched AMPL can mature into raw AMPL when rotation balances are insufficient, raw AMPL can be rotated out for tranched AMPL whenever rotation balances become sufficient.

Here’s the punchline: Re-framing the problem of designing a stable-asset as one of designing a perpetual derivative with bounded volatility, has eliminated all catastrophic breaking conditions in our case—and by the way, invalidates the “endogenous collateral” argument entirely.

Would you rather your gold derivative be collateralized by gold or dollars? The answer is gold.

This approach reaches beyond the known list of catastrophic design flaws that affect “stablecoins,” in the sense that a perpetual derivative designed this way, simply cannot possibly have any murder-suicide conditions built into it.

Think about this for a moment. We’ve just articulated above the worst case scenario and it’s nowhere near catastrophic. SPOT is a floating-price token, it just happens to be much less volatile than any we’ve seen to date.

The Marginal Utility of SPOT

The marginal utility of SPOT will be determined by its distribution of time spent: near the volatility levels of the CPI-adjusted dollar vs near the volatility levels of AMPL.

In the likely scenario where most of SPOT’s time is spent near the CPI-dollar multiple, it can be used as a peer-to-peer digital cash and refuge from inflation.

In the unlikely scenario that almost no time is spent near the CPI-dollar multiple, it’s a commodity-money with no non-monetary utility, much as Bitcoin is. And can be used as a different sort of refuge from inflation (ie: the way equities and other investment assets can be thought of as a refuge from inflation).

And you can imagine any number of time distribution scenarios in between.

Summing Things Up

There you have it, the high level dynamics of SPOT protocol have been covered and I’ve outlined the complete spectrum of outcomes. This spectrum ranges from entirely non-catastrophic in the worst moments, to holy-grail-money in the best.

I cannot overstate the benefits of rescoping this problem of creating enduring, decentralized, stable assets — to that of producing durable low volatility on-chain derivatives. This subtle shift in perspective has unlocked avenues of insight for us and I hope it does for you as well.

What remains is merely a discussion of how much optimization can be applied to shifting the bias of time spent towards one side of the spectrum — and how this shapes the asset’s future role in the market. A piece requiring different context, for a different time.

This is the way,
Evan Kuo
https://twitter.com/evankuo
ampleforth.org
spot.cash

The SPOT Flatcoin — A Low Volatility Derivative was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Thus far we’ve been carefully observing the SPOT protocol’s behavior, but we have yet to meaningfully encourage growth of its circulating supply. This is by design.

We recognize that the amount of rotation capital staked in the stAMPL vault can already support considerably more SPOT than is currently circulating. Moreover, we understand that increasing SPOT’s market cap and deepening its liquidity brings more utility to SPOT.

That being said, we believe this protocol has the potential to be an important innovation for society at large—and that healthily scaling SPOT is important for the long run success of the project.

What does it mean to scale healthily?

To us it means putting infrastructure into market that organically:

• Cultivates Elasticity: SPOT’s supply should organically scale up and down based on demand.
• Cultivates Liquidity: Large amounts of capital should be able to enter and exit SPOT.
• Cultivates Counter Cyclical Trading: Market actors should be adequately informed and incentivized to bring counter cyclical demand.

Rotation vault v2 is an incredibly important step towards preparing SPOT for scale. Swaps enable elasticity and counter-cyclical demand.

Roadmap to Scale

1. Release — Rotation Vault V2 and begin lifting mint ceilings
   pending snapshot
2. Onboard — Third party Mint Redeem Arbitrage Infrastructure
   in progress
3. Onboard— Third party Counter Cyclical Arbitrage Infrastructure
   in progress
4. Release — SPOT/USDC high yield pool
5. Remove — Mint Ceilings

At this point, we’ll be ready to promote the strategic diversification of USDC into SPOT/USDCs pairs in order to trigger growth in SPOT’s supply.

Scaling SPOT was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Spot v2 adds a number of new features, but there’s one — Swaps — that’s particularly relevant for price arbitrage. Let’s dive into the mechanics and look at how this new operation helps to keep prices inline and efficiently scale SPOT supply with demand.

How Spot v2 Swaps Work

For full details see the docs page, but here are the two things you need for understanding the arb loop:

1. Any user can swap between AMPL and SPOT, one-to-one, without having to hold intermediate tranches.
2. Swaps to and from SPOT result in minting and redeeming SPOT, and thus impact the SPOT supply.

You can also think of swaps as being “quick mints” or “quick redeems”. It leverages the free assets within the rotation vault so that you, the user, don’t have to manage fixed-maturity tranches that result from the normal mint and redeem flow.

If you want to share in the fees from these swaps, you can stake into the rotation vault here.

Arb Level 1 — Mechanics

Case 1: Price(SPOT) < Price(AMPL)

Consider the current market prices of SPOT and AMPL to be $.95 and $1

• (optional) Flash borrow 100 USDC
• buy 105.26 SPOT at $.95
• swap 105.26 SPOT -> 105.26 AMPL at vault
• sell 105.26 AMPL for 105.26 USDC
• (optional) repay flashloan

At the end of this operation, you would net $5.26. Note that this is a simplified example that doesn’t account for market slippage or fees.

Case 2: Price(SPOT) > Price(AMPL)

Consider the market prices of SPOT and AMPL to be $1.05 and $1

• (optional) Flash borrow 100 USDC
• buy 100 AMPL at $1.00
• swap 100 AMPL -> 100 SPOT at vault
• sell 100 SPOT for 105 USDC
• (optional) repay USDC loan

This nets $5, again not including market slippage or fees for simplicity.

Note a few things:

First, each operation is immediately profitable and they can be executed atomically. In fact, if this is run by a bot, it would be programmed to only finish execution if there were a profitable outcome. These operations can easily be configured to be a zero risk affair, and are open to anyone.

Second, neither direction requires taking long-term market positions the way CDP-systems do. This allows Spot to bypass the primary scaling roadblock CDP-based coins face.

Impact of Fees and Slippage

Swaps are made possible because stakers in the Rotation Vault (stAMPL) lend out their free liquidity for a fee.

Generally speaking, arb agents are ok paying fees. As long as a transaction is profitable, there is a market opportunity that can be seized. The size of the fee, however, determines the point where the arb profitability begins.

For example, if the fee is 5%, then you would expect arb actions to begin taking place only once the SPOT and AMPL prices start diverging greater than 5%. So a 5% fee implicitly defines a volatility band.

If the fee is large, the band is large, and you would expect fewer overall arbs, but with a high fee when it does execute. If the fee is small, the band will be small, and there would be more arb transactions but with smaller fees.

Swaps do not prevent the v1 arbitrage flow that existed before. If you’re an advanced user, who is able to accurately price the risk of holding tranches over a few weeks, you can still execute that flow with lower fees (i.e. sooner) than swappers.

Whenever a market buy or sell is performed, as is done around the Swaps above, market prices adjust in response. No matter what, at the end of these ops, the prices of AMPL and SPOT will converge.

When SPOT is small relative to AMPL, then you would expect SPOT’s movement to be large, and AMPL’s movement to be small. The size of the arb operation is a function of the slippage on the lowest liquidity asset.

Arb Level 2 — Price Compression

When you factor in price impact, what does this result in? Essentially, Spot is like an asset with AMPL’s price distribution but no supply changes from rebase. If you had this asset, ask yourself, “How would I go about trading it?”

If you know the price will always mean revert, and you don’t have any exposure to the supply rebase adjustments of AMPL, you could safely buy that asset when it’s below the peak, and sell that asset when it’s above the peak.

A Market Maker once told us, “A non-rebasing asset with AMPL’s price distribution would be the holy grail of any decentralized currency.”

These trades would rapidly compress the standard deviation of that price distribution until it approaches something more similar to a dollarized stablecoin.

Level 3 — Mutual Stability

The amount that SPOT moves or AMPL moves as a result of arbitrage depends on the relative market depth of each asset. When SPOT is small and AMPL is large, we could expect SPOT to mostly follow AMPL’s movements. But, as the market sizes of these two assets come into balance, we could start to see mutually-stabilizing affects both ways — further solidifying SPOT’s store of value and AMPL’s unit of account, increasing the utility of both of these assets.

The potential affects on the broader crypto ecosystem of a stable SoV, backed by decentralized assets, are quite compelling. In a sense, this is a crypto markets growing up. Instead of just being a fair-weather ecosystem at the mercy of bears and bulls, crypto can become a valuable year-round resource.

Arb Recap

Layer 1 — Flash swaps bring SPOT’s price distribution inline with AMPL’s price distribution.

Layer 2 — As Spot, a non-rebasing asset, proves to be mean reverting for price, normal market forces serve to further tighten that price.

Layer 3 — AMPL and SPOT mutually stabilize

Limits on Swaps

Swaps do have some restrictions. Namely, one swap direction may not be available if:

• There is not enough free AMPL in the rotation vault, or
• The balance between Spot and stAMPL is too far from equilibrium See: Deviation Ratio

If the capital in the rotation vault is too small relative to the supply of SPOT, it would be precarious to increase SPOT supply further. Thus, swapping from AMPL to SPOT is turned off. This could result in SPOT’s market price temporarily being higher than AMPL until (1) Spot supply decreases, or (2) rotation vault capital increases. The same principle works in the other direction.

In the design of AMPL and Spot, we always welcomed short term volatility if it was in the service of long term durability. This is one great example. In this instance, we chose to prefer price volatility due to limited arbitrage vs price volatility due to maturing Spot collateral. Also note the second feature introduced in vault v2 — bi-directional rotation fees. Bi-directional rotation fees perfectly complement swaps, because they always provide a long term incentive for the system to gradually return back to a SPOT/stAMPL balance.

Conclusion

The introduction of Swaps into the Spot system not only has the potential to solve the main scaling problem hampering existing decentralized stablecoins, it also has the ability to tighten market prices in the process. If Spot and Ampleforth are able to achieve this final state, perhaps we can finally claim a meaningful step towards something that’s been promised since the original Bitcoin whitepaper — a Peer to Peer Electronic Cash.

How Spot v2 Makes Arbitrage More Efficient was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

A reflection, not financial advice.

“There was once a dream that was Rome. You could only whisper it. Anything more than a whisper and it would vanish… it was so fragile.” — Marcus Aurelius, Gladiator

In 2017, when we first started dreaming about decentralized stables, there was an idea I found particularly interesting. That is the notion that a widely adopted stable asset, collateralized entirely by one or more decentralized cryptocurrencies, could significantly change the market behavior of the entire asset class.

Today, the market still follows precisely two animal spirits, bear and bull, fear and greed. People buy cryptocurrencies in times of greed, and sell into safe-assets in times of fear. Yet although there’s enough variation between cryptocurrencies to manage a portfolio’s risk while markets are bullish, correlations tend towards 1 when markets are bearish. So investors remove their assets during bear markets altogether — and these cycles are painfully long-lived.

But what if a widely-adopted, durable, safe-asset, was collateralized by one or more cryptocurrencies?

Well, assuming demand for this safe-asset propagates into demand for its underlying collateral, one or more cryptocurrencies would simply grow in times of fear, decoupling from the rest. At scale, this sort of counter cyclical demand could give reason for portfolio managers to maintain continuous exposure to the asset class — because there would always be something growing.

We tabled this whispered thought long ago. As it turns out, creating a durable decentralized safe-asset is not a trivial endeavor. And we simply needed to focus on its design and development first.

Now, with the release of SPOT’s v2 rotation vault, I find myself revisiting the subject of “counter cyclical demand” quite often. It is finally relevant to the SPOT / AMPL ecosystem and I’ll explain why here.

SPOT → AMPL Without the Supply Volatility

AMPL, launched in 2019, has mean-reverting price around its target, the CPI-adjusted 2019 dollar. And it has been demonstrated rather clearly now that the price of AMPL always returns to target, even through extreme market conditions.

With a price distribution like the one pictured above, you would think it both simple and profitable to apply the counter cyclical strategy of purchasing AMPL under its price target and selling over its price target.

But it’s not that straightforward, because although it’s clear that price will eventually revert to the 2019 dollar target, holders cannot precisely know how long this process of finding an equilibrium will take. And in the meantime, they are exposed to volatility through supply rebasing.

The upcoming SPOT rotation vault upgrade changes things.

V2 — Closing the Arbitrage Loop

SPOT, a low volatility derivative of AMPL, is undergoing an upgrade to its rotation vault that will allow users to directly swap between AMPL and SPOT.

The upgrade will make it trivial for market actors to arbitrage between the two assets. When prices deviate between the two assets a third party can simply buy one, swap it for the other, and sell to keep the difference.

This sort of simple arbitrage will have the effect of making SPOT trade like AMPL except without the supply volatility. Meaning it will share AMPL’s mean-reverting price distribution, but won’t rebase. Thus, it will be straightforward for market actors to:

• Buy SPOT under the AMPL price target
• Sell SPOT over the AMPL price target

Doing so captures value without requiring speculation around the timeline to find equilibria—in all but the most extreme circumstances—because unlike AMPL, SPOT is not exposed to automatic supply changes.

And lastly, once the v2 upgrade completes, counter cyclical demand driven by SPOT will propagate into counter cyclical demand for AMPL.

Plainly stated, the swapping mechanic allows rational acting counter cyclical demand to enter the AMPL ecosystem.

Of course, the knowledge that someone out there will be buying and selling SPOT counter cyclically — combined with the understanding that doing so puts corresponding pressure on AMPL — should further cause AMPL to find equilibria faster, narrowing its price distribution.

Glimpsing this sort of micro-scale counter cyclical demand mechanic, like seeing the first of a new species swimming in a petri dish, begs the question: Might there be some kind of medium-scale counter cyclical dynamic around the bend?

AMPL to SPOT — A Counter Cyclical Mantra

Returning to the broader context above, I can’t help but wonder: What happens if the folks who are long AMPL, collectively choose to retreat into SPOT or some SPOT / USDC pool, whenever they feel the asset is overheated?

My sense is the very act of retreating from AMPL’s supply volatility in this way, would meaningfully counter negative supply changes, creating fast floors after run ups.

This sort of medium-scale counter cyclical behavior would be the beginning of something powerful and new.

Surely, if such a behavior were happening at the scale of USDT—and folks were rotating into SPOT-like assets when seeking refuge—the market dynamics of the entire cryptocurrency asset class would change.

Food for thought,

Evan Kuo
https://twitter.com/evankuo
ampleforth.org
spot.cash

SPOT v2 — The Path to Counter Cyclical Demand was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Technical Scalability

Technical Scalability

Stablecoins, however, are more than just a technology stack. They are also economic systems — and the economics must scale as well. I’ll take as a given the technical scalability of blockchain infrastructure, and focus on economic scalability from here.

Economic Scalability

I’ll define scalability in terms of a simplified model of a stablecoin. Let’s say the stablecoin token S is a note which is a claim on some collateral asset C, that is held in reserve.

For simplicity, let’s also assume that the underlying designs are all “equivalently valid” and work within some set of acceptable market conditions.

The model I’ll use for economic scalability is — demand for the stablecoin note must lead to the creation of more notes in circulation.

If the number of notes in circulation does not scale with demand for the note, then it scales with some other market system. If that other system is not directly correlated with the demand for the note, then there is a misalignment of growth drivers.

How do notes get created today?

Tether and USDC

Many people use USDT, but comparatively fewer actually mint USDT. The average user buys it off the market. If enough demand caused the price to increase over $1, then arbitrageurs may profitably:

1. Go to the Tether corporation and mint USDT in exchange for dollars
2. Sell those new USDT into the market, capturing the price difference

There is a 0.1% fee. So as long as the price of tether is greater than .1% of the associated collateral value, then that arb operation is profitable.

There is a tight market growth cycle:

• more demand for USDT leads to ->
• market price increase relative to collateral ->
• arbitrage increases supply of USDT ->
• arbers sell USDT into market, bringing price back inline

More demand for USDT leads to more USDT being created

You can apply the same operation in reverse for supply contraction. The two in combination result in market price stability. USDT supply increases and decreases commensurately with market demand for USDT.

It’s also worth noting that, if a large player like a market maker wanted to acquire more USDT than the market liquidity allowed, they’d just go directly to Tether and mint. The case above still holds, though — more demand for USDT leads to more USDT, even if it sidesteps the market.

Tether (or USDC) is a very good stablecoin model that scales economically but… it’s also very centralized.

Why does this simple system work so well? Because… the collateral behind USDT is the dollar, and the dollar is already stable. Tether does not need to “create” stability, it only needs to maintain 1:1 parity against its underlying. If you’re building a decentralized stable and want to work as efficiently as Tether, you’d need to first “solve the stablecoin problem”, in order to solve the stablecoin problem.

So given all the above, how do the biggest decentralized stablecoins scale?

CDPs

MakerDAO pioneered this architecture with single collateral DAI, though it now supports many different collateral types (including USDC and many other RWAs today). Liquity, RAI, and others use a similar base design, with various changes and additions on top. CDP architectures are currently the dominant form of stablecoins, behind the Tethers and USDCs.

Very quickly — a note is created by borrowing against a set of collateral. A borrower (minter) deposits collateral into a “Collateralized Debt Position”. A CDP is over-collateralized by some margin. So if you deposit 100 units of collateral, you might receive 50 units of notes. As a CDP owner, it’s your job to maintain the health of your CDP position. If the value of your collateral drops far enough relative to your loan amount, your collateral is put up for liquidation, and sold at a discount to help the overall protocol remain solvent.

Minters are borrowers, and thus continually pay interest to keep their CDP position open.

Here is the same market growth cycle example we saw for Tether:

• more demand for S leads to ->
• S market price increase relative to price target ->
• arbitrager mints S by opening a CDP and borrowing against C
• arbitrager sells S into the market, capturing the price difference

At the end of this operation, the arbitrager still holds an open CDP. At some point, the arber needs to buy back S to repay the loan, close the CDP, and stop paying interest. But — it won’t make sense to buy back S until it’s price has decreased sufficiently below the price they sold it for.

The longer they need to wait for the market to move, the more interest burden they have accrued, and thus, the further the market must move for the operation to remain net positive.

During this time, S moves according to the market and can also potentially move in the undesired direction.

In practice, we’ve seen that arbitrageurs are not willing to perform this operation except in cases of very large divergence. This is why MakerDAO instituted extra systems like the PSM, which also furthers reliance on USDC.

The important point here is that, in CDP systems the note supply scales with demand for leverage, not necessarily demand for the note itself.

Since demand for S is determined by a different system, you need to look at that system to know how S scales. Demand for leverage will generally follow borrow rates. If your system doesn’t offer the most competitive borrow rates, then borrowers (minters) will likely go elsewhere, where they can borrow for cheaper. Interest rates must be actively managed against an evolving market.

Why do some Bitcoiners sometimes talk about having a money not depending on credit? Issues like the above are some reasons why.

Tranches

Spot uses a different architecture in place of CDPs. Spot is backed by a rotating set of senior tranche positions.

When a minter mints SPOT, they first tranche AMPL into a senior (low volatility) position and a junior (high volatility) position. The senior tranches are deposited and newly minted SPOT is returned.

The minter thus may maintain the same exposure to the underlying AMPL over the maturity of the junior tranche (max 28 days currently).

Here is the same market growth cycle as above, but with SPOT:

• More demand for S leads to ->
• S market price increase relative to collateral set ->
• arbitrager mints S by depositing Senior AMPLs and holding Junior AMPLs ->
• arbitrager sells S into the market, capturing the price difference

In the CDP example, the arber holds exposure to the volatile collateral (ETH) and pays interest on a CDP position, both for an unknown period of time.

In the SPOT example, the arber holds exposure to a volatile asset (~equivalent to AMPL) for a known period of time and (may) pay a one-time mint fee. So, the operation for SPOT is still not a zero-risk affair — the Juniors could go up, or they could go down.

BUT, in the SPOT case, the arber does not have a continually larger interest burden to overcome, and they have some additional options to derisk holding the volatile Juniors:

• Junior tranches are tokenized, so they may be sold into the market to buyers who seek leverage, or
• Junior tranches may be redeemed up to a week early, by interacting with the rotation vault through melding (coming soon in vault v2).
• If the matching As are able to be acquired some other way, then both the As and Zs may be redeemed immediately.

Markets for tranches are not yet fully developed. But the some tooling does exist, and the market for such a new system is still nascent.

Comparing CDP and Tranche Based Stablecoin Arbitrage

So neither CDPs nor tranche based stablecoins are quite as efficient as Tether or USDC, but that is to be expected with any decentralized stablecoin that can’t rely on an already existing stablecoin as collateral.

CDP Arbers:

• Hold exposure to volatile collateral in the CDP for an unknown period of time
• Pay interest to service the CDP for an unknown period of time
• Have a growing interest burden that must be overcome during the arb timespan, making the arb more difficult

Tranche Arbers:

• Hold exposure to a volatile collateral for a fixed period of time
• (May) Pay a known, one-time minting fee
• Have options to exit the position early, if desired

Conclusion

I hope this comparison has helped increase understanding of some market mechanisms involved in stablecoin protocol designs. This article focused on marginal demand for SPOT, but you can also read more about estimating aggregate demand for Spot on the dedicated docs page About Scalability.

If you want to learn more about Spot, I recommend watching the video linked above, reading the Spot Docs, or joining any of the Spot/Ampleforth community channels.

And as always, I’d love to hear comments. If you believe anything above unclear or needs correcting, please comment down below.

NB: Liquity has recently announced a v2 that aims to address some of the scalability issues related to CDPs. I encourage you to read that here.

Economic Scalability of Tranche- and CDP-Based Stablecoins was originally published in Ampleforth Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.