AMPL on Aave — The Story So Far [Part1]
$AMPL on Aave went live on July 24, 2021, and the $AMPL degens came out swinging!
Near instantly, almost all of the available liquidity was scooped up by borrowers hungry for $AMPL. The first day of $AMPL being live on Aave saw a utilization rate of 80–90%. The days following saw utilization near 100% and this is where it stands today:
As liquidity came in, the degens kept on borrowing. They continuously refreshed the page so they could scoop up all deposited $AMPL liquidity as soon as it arrived.
But why? Why is there so much borrowing demand for $AMPL?
$AMPL was (and still is) in such high demand due to a plethora of reasons:
- It’s the first “Elastic Class” asset to be listed on Aave.
- The $AMPL spot market was in a relatively extreme condition — $AMPL price reached a recent high of $2.35 on July 26.
- $AMPL experienced a series of positive rebases — the highest being 6.99% on July 26.
- The borrowing interest rate is just 48% — this fee is nothing compared to the 1000s and even 100,000s of APY % you could make from just holding $AMPL.
This last reason was the real kicker.
Borrowers of $AMPL were making bank on their borrowed $AMPL; not only from the rising $AMPL price but also from the positive rebases that come with it.
You see, $AMPL borrowers are essentially borrowing the rebase. When their borrowed $AMPL positively rebases they get an increase in supply and can keep that as profit, and pay back the original borrowed amount.
And if they play it smart (with a bit of luck) they can wait for the $AMPL price to come back to below where they borrowed it to pay it back — $AMPL always trends back to its price target to reach equilibrium. So if you borrow $AMPL when it’s priced high, there’s a good chance you can pay it back at cost or a lower price.
In this way, $AMPL is a safe denomination of debt and borrows like a stablecoin. Better yet, it actually borrows better than a stablecoin due to the tremendous % gains from rebases.
That’s why $AMPL utilization on Aave is so high.
Massive APY % Gains — Borrowing $AMPL Case Study
Case Study #1
July 25, 2021: I Borrowed 4000 AMPL
The fee was variable but was mostly 48% APY.
TLDR:
3 days of fees = 13 AMPL in fees
3 days of rebases
Total profit = 544 AMPL
In this case study, borrowing $AMPL was risk-free. I paid back the loan on July 28th and kept the 544 AMPL profit.
The result of borrowing $AMPL when I did, was MILLIONS of % APY annualized!
There’s nothing else quite like it ;)
Case Study #2
July 26 and 27: This wallet Borrowed $100k+ AMPL
The fee was variable but was mostly 48% APY.
TLDR:
This whale borrowed as much $AMPL as he could for 2 days and profited from a 6% and 5% rebase. Then, on July 28, $AMPL started to head into a negative rebase and the whale paid back the $AMPL and kept the profit.
Result:
12,814 AMPL profit from just over 100k AMPL lent in 3 days. Again, that’s MILLIONS of % annualized and it’s all RISK-FREE.
Takeaways:
In both the case studies presented above, borrowing $AMPL was extremely profitable and risk-free because $AMPL was positively rebasing. When $AMPL is in a positive rebasing period, the strategy here is to borrow as much as you can. Because you are essentially borrowing the rebase and profiting from the difference in Aave fees and the rebase.
If you see $AMPL trending towards 0 or a negative rebase, you pay back your debt obligation — in $AMPL. And you keep the profit.
Borrowing & Lending Incentives — Finding the Balance
Thus far, we have witnessed incredible borrowing demand for $AMPL.
This is great as borrowers are the lifeblood of Aave. In fact, the most important factor to preserve in any Aave pool is the demand to borrow. So seeing as $AMPL borrowing is sustaining an unprecedented 100% utilization rate, I’d say we’re off to a good start.
However, there’s just one problem.
Everyone wants to borrow $AMPL but nobody wants to lend $AMPL. :(
The reason its this way is because the maximum cap of the interest rate curve for borrowing is not able to reach a high enough value to effectively balance incentives between the borrow side and lending side of the marketplace.
For example:
$AMPL lenders can earn 35% APY while borrowers on the other side are earning 1000s, 100,000s, and even millions of % APY during periods of positive rebases.
It’s just not fair. That’s why nobody is willing to lend.
The borrow/lending incentives need to be better aligned. And that’s exactly what has been proposed by the Ampleforth CTO, Brandon Iles.
On July 26, 2021, Iles submitted an Aave Improvement Proposal (AIP) titled ARC: Raise AMPL maximum interest rate.
The proposal suggests a new variable interest rate model which will result in overall higher fees coming into the system, thus greater incentives for $AMPL lenders.
Thus far, the AIP was received extremely well by both the Aave and $AMPL communities. There are many intellectual and thought-provoking comments in which I encourage you to go check out for yourself.
One such comment was highlighted by Evan Kuo, Founder and CEO of Ampleforth:
Expanding on the quote above, the big brain “BNM” also said:
“The ARC as proposed should strike a better balance between APY for depositors and upside potential for borrowers but not cut too deeply into the upside potential of borrowers to harm that side of the market.”
He then explained what’s likely to happen as a result of this ARC once implemented:
“An increase in APY for $AMPL lenders will bring in more lenders as the higher APY will be compelling to a larger group of AAVE users. Borrower demand for $AMPL will remain strong as $AMPL has a predictable debt obligation yet upside for borrowers will dampen as the utilization rate approaches 100% and the 10002% APY limit.”
“I could see there being adjustments and refinements in these parameters in the future because it is difficult to perfect the limit at this time. It is clear that the ARC as proposed is moving in the direction which is correct, but towards a precision that is difficult to know. What will happen with this ARC is that the AMPL market will come into a better balance which will allow the pool to grow, generating a better outcome for pool users.”
So yeah. Once this AIP gets voted on, passed, and implemented, we can expect to see:
- Many more $AMPL depositors.
- A significant rise in the total available liquidity
- A healthy drop in $AMPL utilization to ~75%
- More $$ for Aave generated from fees
- Happy lenders
- Happy borrowers
- Happy Aave users
- Happy $AAVE & $AMPL token holders :)
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Things are about to get interesting ;)
