AMPL is a New Asset Class for Aave — A World’s First

$AMPL on Aave is here, and it’s the most innovative asset ever to be listed on Aave.

I’m serious.

Now listen up.

  • It’s going to change how people think about lending and borrowing.
  • It’s going to push Aave and the DeFi frontier forward.
  • It’s going to transform the DeFi ecosystem.

$AMPL is not just another thing to lend on Aave. It’s much more than that.

$AMPL is the pioneer of its own asset class — elastic (rebasing) assets. The unique mechanics and economics of $AMPL open up a whole new world of never-before-seen opportunities when it comes to lending and borrowing.

That’s why $AMPL on Aave is such a groundbreaking development. And that’s why $AMPL will transform the DeFi ecosystem and drive Aave’s innovation forward.

Now, in this piece, I explain how and why $AMPL behaves differently from other crypto assets when it comes to lending and borrowing. I dive deep into the mechanics of lending and borrowing $AMPL. And I explain how $AMPL gives both lenders and borrowers what they want.

Eli5 on $AMPL:

If you’re already familiar with $AMPL skip to the next part.

$AMPL is an elastic asset — its supply can increase and decrease. The Ampleforth protocol automatically adjusts supply in response to demand daily (i.e., When the price is high, wallet balances increase. When the price is low, wallet balances decrease).

$AMPL is non-dilutive like Bitcoin. Its supply adjustments are applied universally and proportionally across every wallet’s balance (regardless of whether you hold it yourself, on a DEX, or CEX). The number of $AMPL you own can change each day, but your percent ownership of the network always remains fixed.

$AMPL is not a stablecoin because its price is not stable. Instead, it fluctuates frequently around the target price of USD 1.00 (*CPI-adjusted 2019 dollar) and can extend far above or beyond that during periods of network growth or contraction.

$AMPL is not an asset whose price appreciates in the long run. Its rebasing mechanism incentivizes market participants to sell $AMPL when its price goes way above $1. Conversely, when its price goes below $1, market participants are incentivized to buy $AMPL at a discount.

$AMPL supply is what matters, not price. Investors buy $AMPL with the anticipation of the $AMPL network expanding and growing. As the $AMPL network grows, the supply must grow with it, and thus everyone’s $AMPL balance.

The Economics of Borrowing Crypto Assets

Three things that can happen to an asset when you borrow it. The price of that asset can:

  1. Decrease
  2. Stay the same
  3. Increase

Why is this important? Because irrespective of the outcome of what you do with the asset, you are on the hook for the amount of the asset you have borrowed.

Let’s look at Stablecoins

If you borrow 10,000 USDC to go long $ETH, you will owe 10,000 USDC — which has the value of $10,000.

If your $ETH investment 1) Decreases. 2) Stays the same. Or 3) Increases.

You still owe 10,000 USDC no matter what. There is no change to the number of tokens or the value that you need to pay back because the price of $USDC always stays the same (it’s a stablecoin).

Therefore, it behaves exactly the same in all three scenarios — because the stablecoins value never changes. This makes stablecoin assets like $USDC the most borrowed assets by a considerable margin.

For example:

$USDC on Aave has:

  • High utilization rates -70% — 75%
  • TVL - +$5.5 billion
  • Available liquidity - $1.5 billion
  • Stable borrowing APY - 10.63%
  • Variable borrowing APY - 3.26%

$ETH on Aave has:

  • Low utilization rates - 4% — 10%
  • TVL - +$4 billion
  • Available liquidity - $1.7 million
  • Stable borrowing APY - 3.66%
  • Variable borrowing APY - 0.53%

There’s a significant difference between the utilization rates, available liquidity, and borrowing APY’s between $USDC and $ETH on Aave. $USDC is the winner here.

As for AMPL on Aave, I’ll get to this later in the article.

For now, take note that virtually all borrowing happens with stablecoins.

Why?

Because they allow the borrower to know exactly what they owe at all times, they provide a safe denomination of debt, and that debt remains stable.

However, stablecoin assets like $USDC are not the be-all and end-all. They have a fair amount of risks, too — (i.e., centralization risks, freezing asset risk, collateral risks, and the assets can break). Their only true advantage is that the debt is stable, and the borrower always knows exactly what they owe.

But what about non-stable assets? How do they fair for borrowers?

Let’s look at Non-Stable Crypto Assets

Take $ETH or $BTC, for example.

Virtually no borrowing occurs with these assets. Their utilization rates on Aave are very low (4–10% for both $ETH and $BTC).

Why?

Because these assets bring a lot of risk to the borrower and do not offer any upside, worse still, it is impossible to know how much a borrower will owe when their loan is due. This high-risk, low-reward scenario surrounded by absolute uncertainty causes most borrowers to leave assets like Bitcoin on the shelf, never to be borrowed.

Let’s look at an example.

If a borrower chooses to borrow $10,000 worth of Bitcoin (0.26 BTC as of this writing) and sells that Bitcoin to go long $ETH, three things can happen when the borrower chooses Bitcoin:

1) The price of Bitcoin can decrease. 2) The price can stay the same. Or 3) The price can increase.

Let’s look at each of these scenarios:

  1. The price of Bitcoin decreases — The borrower wins because when they need to pay back their Bitcoin, that Bitcoin is now cheaper to purchase back than what they borrowed it for. The borrower has effectively shorted Bitcoin.
  2. The price of Bitcoin stays the same — Nothing happens. The borrower owes the same amount of Bitcoin + fees. Their position is unchanged.
  3. The price of Bitcoin increases — The borrower is now in trouble. The borrower owes more $$ in Bitcoin than they borrowed. This means that the borrower will suffer a loss.

Do you follow?

Out of the three available scenarios, there’s only one where the borrower can win. That’s a 33% chance of winning.

Personally, I don’t like those odds. And if you think you can beat them. Think again.

Bitcoin is intensely volatile, and it is impossible to tell what will happen to its price when you take out a Bitcoin loan. You have to count on Bitcoin either remaining flat or decreasing in value when the loan is due. That said, the potential for loss, and I mean significant loss, is quite extreme.

Now, what if I told you there was an asset class for borrowing with zero losing scenarios? Whether the price decreases, stays the same, or increases. You just win.

You’d wanna know about it, right? Keep reading my friend.

Let’s look at $AMPL — The Elastic Asset Class

$AMPL is the pioneer of the “Elastic Asset Class” and is the first asset of this type to get listed on Aave for lending and borrowing.

$AMPL is unlike anything else in crypto as it has two fluctuating variables, Price and Supply. The Ampleforth protocol transforms price changes into supply changes which are realized across every wallet’s balance.

It’s kind of that simple.

Seeing as traditional crypto assets like $BTC or $ETH have just one moving axis (the price). And stablecoins have zero moving axes. The economics for lending and borrowing $AMPL are naturally quite different.

In fact, the unique properties of $AMPL make borrowing this asset incredibly lucrative for borrowers as it changes the inputs and thus outputs of Aave’s finance stack:

Now, if we examine our three price scenarios:

1) The price of $AMPL decreases. 2) The price stays the same. Or 3) The price increases.

What’s the outcome?

  1. $AMPL price decreases — The borrower of $AMPL wins in this scenario because they effectively shorted $AMPL and made a profit. — If they trade from $AMPL to something else, then the price goes down, and they repurchase their $AMPL cheaper than they borrowed it at. (i.e., Borrow → Sell → Wait for lower price/negative rebase→Buyback→Return)
  2. $AMPL price remains the same — The borrower of $AMPL has the desired effect — unchanged debt repayment obligation (like a stablecoin).
  3. $AMPL price increases — The borrower profits from the positive rebases and is in a profitable position against their debt. They can pay their debt off and keep the positive rebases as profit. If the borrower is long and holds the $AMPL, they can win significantly as their borrowed asset positively rebases — they get an increase in supply and can keep that as profit and pay back the original amount.

Would you look at that? You can win in all three scenarios!

Now here is Brandon Iles, the Ampleforth CTO explaining it in more detail:

Never before has there been an asset that borrows better than a stablecoin in every possible scenario until now. $AMPL is changing the lending and borrowing game. Period.

Follow me here and on Twitter for more $AMPL alpha.