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Understanding AMPLEFORTH - The Value of Supply Elasticity

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Avatar for kevnag
Written by   1
1 year ago

Economics 101: as with any fixed supply currency such as Bitcoin, any change in demand for the currency affects the value (price) of the currency. Therefore, the volatile nature of demand based on real world forces and economic conditions cause wide swings in the value of any fixed supply asset. So, any sudden crisis could adversely reduce demand for the currency thereby tumbling the system the currency supports. As demand fades away, the fixed supply currency's value fades away as well causing loss of value to the system. For the little guy ordinary investor (such as myself) this means a loss to my pocketbook.

While the big investors can manage this risk of loss what is the little guy to do? This led me to start researching this question and lo and behold - enter Ampleforth. First off, what is Ampleforth. Ampleforth is an Ethereum software that attempts to maintain itself with a value equal to the US Dollar while providing benefits to its holders by supply manipulation. It is not a Stablecoin per se in that Ampleforth has no collateral backing. Instead, the algorithm reaches a balance by accounting both price and supply in the system. The balance reached does not change the price of the token but rather changes the investor's supply of the token. This is done daily by a process known as rebase.

What does this mean? Daily, the algorithm governing Ampleforth looks at the price of the token. If the price of the token is over 5% of the target price, the supply of the token is increased and distributed to the holders of the token. If the price of the token is below 5% of the target price, supply of the token contracts. Thus, a stable price environment is created by virtue of the supply elasticity of the token.

As a result of this daily rebasing, the little guy ordinary investor's investment is protected in the long run. Risk is diminished by the supply elasticity, and in fact, it is possible to realize profit in this token during periods of price decline.

I am merely an ordinary small investor who likes to share what I've learned through research into the Crypto World and that which I find interesting . Please take a moment and check out my other articles. I am not in any way a financial advisor and as such, do your own research before investing. If you enjoyed this article please like it, comment and/or tip. Feedback is always welcome here.

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