First Mover: This DeFi-Ready Token Is Teaching Crypto Traders to Cherish Inflation

One of the things crypto traders like about bitcoin is that it’s resistant to inflation, potentially serving as a hedge against the trillions of dollars of money that central banks have printed this year to address the coronavirus-inflicted economic collapse.

But what if a cryptocurrency were designed to produce its own inflation – as a good thing?

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That’s the principle behind the cryptocurrency project Ampleforth’s AMPL tokens, which are suddenly getting a fresh look from traders after a tenfold increase in their total supply over the past three weeks to 340 million.

Though the project’s market capitalization of $398 million is still tiny in relative terms, at just 0.23% of bitcoin’s $170 billion, some analysts say AMPL could see further uptake as a new form of liquidity in the fast-growing arena of decentralized finance, or DeFi.

In fact, demand for the token has been so hot that its current price of about $2.77 is nearly three times the project’s own target of $1.009. The impetus appears to have been Ampleforth’s launch last month of Geyser, a new rewards program that encourages the token’s use on Uniswap, a decentralized exchange.

The token “has been on an absolute tear,” Paul Burlage, an analyst with the cryptocurrency research firm Delphi Digital, wrote in a July 9 report.

Two years ago, a San Francisco-based engineer and robotics researcher named Evan Kuo, alongside co-founder Brandon Iles and their team, decided to tackle a problem in digital-asset markets: tight correlations between bitcoin and alternative cryptocurrencies that make the market vulnerable to widespread sell-offs – as traders scramble for cash or cash-like instruments such as dollar-backed stablecoins.

The dynamic poses risks for DeFi, where the cryptocurrencies are often pledged as collateral on semi-autonomous lending and borrowing platforms.

“The high correlations prevalent in today's cryptocurrencies create systemic risk,” Kuo told First Mover in a Telegram chat.

So in December 2018, the team launched Ampleforth protocol with $3 million in funding from the likes of Brian Armstrong, CEO of the big U.S. cryptocurrency exchange Coinbase; Pantera Capital, a cryptocurrency investment fund; and True Ventures, a Silicon Valley-based venture capital firm.

The project aims to address the systemic risk by designing a token to be mostly uncorrelated with other cryptocurrencies, and also isolated from swings in traditional financial markets.

The secret to the design is a combination of intentional inflation and anti-dilution: When prices for the AMPL token rise above a target, more units are issued directly to holders’ wallets in proportion to their holdings. Theoretically, the extra supply creates inflation that should help to push prices back down, but traders are made whole because they suddenly have more of the tokens.

The mechanism is supposed to limit price volatility, potentially making AMPL tokens more desirable as a stable form of collateral for DeFi systems.

"AMPL's differentiated movement pattern reduces the risk of autoliquidation in the DeFi space," Kuo said.

According to the project’s website, traders can use the tokens to diversify investment portfolios, park as collateral in DeFi or even hold as a “better bitcoin.”

How AMPL works

Ampleforth has set a target price for AMPL based on the value of the U.S. dollar in 2019. And that target price is adjusted continuously based on the consumer price index, which offers a rough way of gauging monthly decreases in the dollar’s purchasing power.

But during times of heavy demand for the tokens, the market price can diverge from the target price. And that appears to be happening now, as traders deploy the AMPL tokens in fast-growing DeFi platforms.

On June 23, AMPL “traded above its price threshold of $1.06 and never looked back,” according to Delphi Digital’s Burlage.

For example, on July 19, the token was trading at $2.95, nearly three times the target price. Under the rules of the protocol, the supply automatically increased by 16% at the end of the 24-hour period, according to Ampleforth’s dashboard.

The extra supply represents inflation that should theoretically reduce the value of each AMPL token. But since the extra supply goes into holders’ wallets, the overall value of their holdings should theoretically stay the same. Inflation, coupled with anti-dilution, as designed.

Burlage wrote that there are strong incentives built into the system encouraging traders to hold onto their AMPL tokens. But the market could turn, since it’s prone to a “cyclical boom and bust cycle.”

“With the price running up, it is now a game of chicken between large holders to see who sells first and time the top,” Burlage wrote.

It might be the future of money, but as is often the case in cryptocurrency markets, speculation and experimentation are the right-now.

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Bitcoin watch

BTC: Price: $9,361 (BPI) | 24-Hr High: $9,445 | 24-Hr Low: $9,304

Trend: Bitcoin is struggling to extend Tuesday's 2.5% price gain.

The leading cryptocurrency by market value is currently trading near $9,360, representing a 0.4% decline on the day.

The immediate bias remains neutral as the cryptocurrency remains trapped in tight range, as represented by Bollinger volatility bands, currently located at $9,424 and $9,037.

A move above the upper band would imply range breakout and could power the cryptocurrency higher to resistance at $9,800 (June 22 high) and possibly to the psychological hurdle of $10,000. Alternatively, a range breakdown would expose the 200-day moving average at $8,560.

A range breakdown may be seen if the global equities suffer sharp losses on the escalating China-U.S. tensions and the U.S. Congress' inability to reach consensus on an additional coronavirus relief package. The cryptocurrency has recently developed a relatively strong correlation with the equity markets.

At press time, futures tied to the S&P 500 and major European indices are reporting moderate losses. Risk sentiment weakened early Wednesday after Washington ordered China to close its consulate in Houston, marking an unprecedented escalation of tensions with the Asian nation.

Note: This article has been edited to show that AMPL's market cap is 0.23% of bitcoin's market cap.