Beyond Speculation, Beyond the Memes: Crypto, DeFi, and the asset that (metaphorically) broke my head wide open
Let’s rip the band-aid off right here at the start: what is your personal definition of Bitcoin? Or cryptocurrencies? Or blockchain? For the former, chances are it is some combination of “digital currency”, “trustless”, “decentralized”, “anonymous” (lol no), “speculative”, “bubble”, “fixed supply”, and so on. The truth is, it’s really difficult to find a middle-level knowledge base for crypto between the simple “digital decentralized currency” and the in-depth explanation involving the blockchain, cryptography, proof of work/stake, trustless mechanisms, and all the mathiness that lives underneath the external product.
Because of this, we have a majority of people under-informed and over-hyped on BTC, ETH, and a variety of “-coin” schemes that are at best an ouroboros of memes coupled with financial shitposting, and at worse a bald-faced pump-and-dump effort for duping nascent users out of their very-real investments. The latter’s over-reliance on the “name+coin” setup has echoes of companies in the late-1990s inflating their market value by adding an “e-” prefix or a “.com” suffix to their company name. The former gets you something like Dogecoin, a memecoin that is being hyped by tech luminaries such as Elon Musk. Musk’s (partially self-hyped) position as a top scientist of our time juxtaposed to involvement in something so speculative calls to my mind a snippet from Benjamin Graham’s The Intelligent Investor. In it, he brings up Sir Isaac Newton and his ill-fated investment in the South Sea Company, a much-hyped speculative investment vehicle back in the day that eventually collapsed when the public realized there was no metaphorical filling inside the pastry. Newton was apparently so distraught with his lost investment that he forbade the mention of the company in his presence and was even quoted as saying “[I] could calculate the motions of the heavenly bodies, but not the madness of the people.” At least Newton didn’t have a specific, readily-available past instance of speculation to dissuade him from making the same mistake; what’s Musk’s excuse?
While the surface-level, public-facing, easily-accessible cryptocoins and processes are mostly driven by speculation on over-hyped, under-built, and/or already outdated processes, that isn’t to say that there isn’t real gold in these mountains of pyrite. Unfortunately for most, it does require the rolling up of sleeves and doing some real, actual work and research to find the real cutting edge offerings that haven’t gotten to the public hype stage just yet. The subset of crypto within decentralized finance (DeFi for short) is pushing the boundaries of financial products and implementations toward democratization to a point not really seen in the finance industry since Jack Bogle built the first index fund in the mid-1970s. Much of this is built off of the back of earlier crypto; BTC took the first step by setting the foundation of a decentralized currency, but iterative improvements have made for advances that are much more practical and/or useful.
For instance, one of the big points-in-favor of Bitcoin versus a government-back fiat currency is that BTC has an inelastic supply of coins versus the elastic supply of fiat currency. The argument here is that elastic supply leads to a dilution of one’s wealth: if a government prints an additional 5% of currency, your held currency declines in buying power due to holding a now-smaller percentage of the total monetary supply. For Bitcoin, a fixed supply means that if you own 2 BTC out of 21 million now, you’ll own 2 BTC out of that exact same 21 million years from now. Unfortunately, that creates a whole new issue, because the overall capitalization of something like BTC is a product between the supply and the unit value. It’s akin to market capitalization of stocks: Market Cap = # of Shares * Price. As Bitcoin hype continues to grow, its perceived value grows as well…but since supply is fixed, unit value must increase to reflect this. It’s a similar concept as the one behind stock buybacks: reduce the supply of shares, forcing the price to increase to keep the market capitalization constant (and why overleveraging debt to push prices upward in the short-term for executives to cash out is a real scumbag move that we’re calling out with our quarterly EASE scores). Inelastic supply could eventually lead to a stable currency that can be used for transactions, but until the value of BTC stabilizes its primary usefulness is in speculation. A volatile currency like BTC is much like a currency in the throes of hyperinflation: the value of the currency is so dynamic that it makes it extremely difficult to price any good or service in the denomination for fear of said price being outdated within days, hours, or even minutes.
However, this concept of inelastic supply and the inherent balance between supply and preservation of wealth that BTC raised is a step in the right direction, one that various other crypto projects have built upon over time. Stablecoins are one pathway forward on the idea, for instance tethering a cryptocurrency to an established fiat currency like USD (DAI and USDC for example). Tethering to an external currency isn’t a new concept itself: 65 countries tether their currency to USD, and some countries even use USD as their own currency (like Zimbabwe after a bout of hyperinflation in 2008 led to trillion-dollar ZWE notes being put into circulation). Each of these stablecoins use slightly different structures to keep their values in-line with the tethered currency, but there’s one stablecoin in-particular that has built a clever structure that not only stabilizes value, but has also found a way to preserve wealth beyond what BTC or really any currency (crypto or fiat) has ever been able to do.
As mentioned earlier, there’s an inherent difference between fiat currency and BTC:
Fiat currency - Elastic supply (keeps prices stable), but dilutive (ownership percentage declines over time)
Bitcoin - Non-dilutive (ownership percentage constant), but inelastic (unit value subject to whims of market valuation, thus can be very volatile)
Ampleforth (AMPL) offers up a third option: an elastic, non-dilutive currency. It does this by keeping wealth constant, something not broached by BTC and pretty much logistically impossible to implement with a physical fiat currency. Let’s look at an extreme example: let’s say AMPL is currently tethered to USD and you purchase 10 AMPL at $1. A spike in demand for AMPL jumps the price up to $2, but since AMPL is tethered to USD it has to get back down to $1 while also preserving the overall wealth of AMPL holders. AMPL does this by increasing supply, but proportionally divvying out the new coins. In other words, AMPL goes back down to $1, but you now own 20 AMPL instead of 10. Your supply of AMPL changes in-proportion to the overall supply instead of your wealth: the amount of AMPL coins you own has changed, but AMPL stays tethered to USD, and your overall wealth has been preserved. Whereas fiat and BTC leave wealth as a variable factor, AMPL forces it to remain static by adjusting the supply across the whole landscape to preserve proportions.
While variable supply to preserve wealth proportions is a remarkable development, it is just a part of the gamechanging innovation that AMPL brings. In the previous example, I tethered AMPL to USD to keep it simple and keep focus on the variable supply aspect of the coin. However, AMPL isn’t tethered to USD: it is tethered to the US Consumer Price Index (CPI). The CPI is an index that is composed of a weighted average basket of commonly-purchased goods and services. The idea behind the CPI is that it reflects the buying power of the average consumer: CPI adjusts as prices for goods and services rise due to increased monetary supply.
Source: U.S. Department of Labor
Essentially, CPI tracks the currency inflation (and deflation) of USD over time. By tethering to the CPI, AMPL is essentially tracking US inflation in order to keep AMPL’s price stable relative to good and services in the US market. This isn’t a new concept: the United States Treasury issues Treasury Inflation-Protected Securities (TIPS), or bonds that adjust to inflation based on the CPI. In fact, much of the underlying concepts that define AMPL and other boundary-pushing cryptocoins aren’t new or all that novel: the amount and complexity of financial engineering that goes into AMPL isn’t any greater than, say, Credit Default Swaps (CDS) or the Mortgage-Backed Securities (MBS) that torpedoed the global financial markets back in 2008. However, AMPL has two advantages over those products: it has the technology to preserve wealth by adjusting proportional unit ownership instead of diluting wealth with increased supply, and by implementing its technology as a stablecoin AMPL is aligning incentives between the creators and the users (versus the perverse incentives that underpinned the continued creation of MBS well past its limitations).
Think of it this way: Let’s say that a cup of coffee is $4. Yes, this is a lot for a cup of coffee, but I am the type of insufferable bastard who roasts and brews his own beans at home; if I buy a cup of cold brew from a coffeeshop I’m not settling for something subpar. This means that as of this moment $100 will buy 25 cups of coffee. If I put $100 into AMPL and keep $100 in my wallet, in a decade I’ll be able to purchase 25 cups of coffee with my $100 stored in AMPL but only ~80 from my $100 bill (assuming a similar trajectory of CPI from the past decade carries over to the next decade). Extend this beyond my coffee snobbery: a middle-class family holds their cash portion of their savings in AMPL instead of USD or a bank savings account with a laughably minuscule dividend, allowing it to keep pace with inflation instead of declining in value over time. Pensions tether payouts to AMPL, keeping the savings of retirees they cover stable to CPI and preventing panicking when shocks to the market occur. An AMPL equivalent in 2020 Myanmar (AMPL.MMR) provides a decentralized preservation of wealth for citizens as the military coup throws the country into disarray. Or for 2016 Venezuela (AMPL.VEN) as hyperinflation kicks in (or for 2008 Zimbabwe, or for 1930s Weimar Germany). Or localized AMPL variants provide wealth stability in northern Mozambique, Somalia, or Chad right now as they are actively being thrown into uncertain futures.
At the end of the day, the promise of AMPL isn’t rooted in speculation, or memes, or any of that shallow, transient bullshit that inundates the surface level of the cryptocurrency landscape. It isn’t in the promise of the engineers behind AMPL making out like bandits because they convinced a handful of suckers to pay them either through high cost-of-entry or through outright trickery. No, it’s in an effort to provide a financial means of price stability and wealth preservation that takes concepts already known but applies them in a novel way with technology that was previously unavailable. That is the promise of DeFi: the continuous democratization of a conservative industry that fights like all hell to resist anything that threatens the established titans’ Smaugian hordes of wealth.