How the SPOT Token Achieves a Stable Value
With the SPOT token’s release in 2023, the blockchain economy now has access to a truly decentralized store-of-value currency at a time where regulatory pressures are increasing and a crackdown on stablecoins has seemingly begun on part of the US SEC.
In the first article of this series, I discussed the shortcoming of the crypto market in providing real value to the broader world as most of the value is driven by speculation.
SPOT and AMPL have delivered a viable way to actually provide real value — developing a decentralized, immutable currency that protects holders from purchasing power degradation.
This has been an issue since the dawn of currencies (especially fiat currencies) with global reserve currencies like the USD losing 96% of its purchasing power since its inception.
In this article, I will cover the mechanics behind SPOT’s collateral and how it maintains a stable value through market volatility.
How is the SPOT Token Collateralized?
To briefly reiterate, the SPOT protocol consists of a set of smart contracts that produces a decentralized store-of-value (SoV) in the SPOT token. SPOT is a freely redeemable, non-custodial, claim on a basket of on-chain collateral that works to maintain a stable value.
This is made possible through AMPL — a stable unit of account that automatically rebases its supply to target the price of a 2019 USD, adjusted for inflation. The AMPL protocol does not use pegs, collateral, feedback loops, or any other artificial mechanics.
Thus, AMPL provides a base collateral that is immutable, unbreakable, and permissionless.
What is the Collateral Behind SPOT?
The SPOT token is collateralized via a freely redeemable claim on a basket of assets of on-chain collateral. In other words, if there are 100 SPOT tokens in circulation, and I own exactly one SPOT token, I can trade in my SPOT token for 1% of the underlying collateral set.
What exactly is in the basket of assets?
AMPL serves as the underlying collateral asset behind SPOT. However, it gets a little more technical than just AMPL. With an understanding of AMPL’s rebasing mechanics, it becomes possible to separate AMPL into tranches.
Tranching is the process of separating the volatility behind an asset into different segments, in this case AMPL’s volatility. The product of doing this is the ability to develop junior and senior tranches out of AMPL’s volatility (with predetermined maturity dates).
The maturity date simply represents when the tranches mature into full AMPL and will be integral in discussing collateral roll-overs below.
The ratios of these tranches are determined by a third protocol called ButtonWood.
ButtonWood Tranches
At a high level, the junior and senior tranches above can be thought of as a way to re-segment risk.
The senior tranches are safer assets as they contain less risk. On a technical level, senior tranches represent a segment of AMPL’s rebase that is more insulated from volatility. This makes them favorable as a store-of-value asset.
The junior tranches contain the riskier segments of the AMPL rebase mechanic, meaning that investors holding these are more exposed to traditional market volatility. This also means that investors holding junior tranches are also exposed to the potential to make gains (or losses) on said volatility i.e. if AMPL appreciates (or depreciates) in value.
In SPOT’s case, the collateral behind the token is made up of bundled senior AMPL tranches.
Automated Collateral Roll-Overs
Recalling the predetermined maturity dates of senior (and junior) tranches above, this mechanic allows for automated collateral roll-overs within the SPOT protocol.
So, why are roll-overs necessary?
If senior tranches alone were kept solely as the collateral behind SPOT, the SPOT token would be subject to more volatility naturally. This is because each senior tranche is exposed to varying degrees of market conditions, hence the need to add a maturity date to incentivize investors to hold tranche assets in anticipation of redeeming their holdings for raw AMPL.
The amount of risk (and subsequent reward) depends on the tranche.
By implementing an automated roll-over mechanic of senior tranches, it ensures that the collateral set behind SPOT is continuously “refreshed” i.e. tranches nearing maturity are rotated out of the collateral set in favor of fresh senior tranches. These fresh tranches have not been exposed to prolonged market exposure, so they help to stabilize the value of the collateral set, and, by extension, SPOT itself.
To summarize, the automated roll-overs, combined with the nature of tranching AMPL volatility, create a collateral set behind SPOT that is unbreakable, decentralized, always on-chain, and, most importantly, stable in value.
Becoming a Superior Store of value (SoV) Currency
With an understanding of how SPOT is collateralized, it becomes easier to understand SPOT’s durable store-of-value properties. Tranching is arguably the most important innovation of SPOT’s design, only made possible by the unique rebasing properties of AMPL as a collateral base.
With SPOT’s collateral set always rotating maturing tranches for fresh ones, SPOT’s exposure to market volatility (already insulated by the nature of senior tranches) becomes even more stable as a SoV over time.
Why couldn’t other decentralized stablecoin projects achieve what SPOT has?
Because it takes the combination of multiple protocols working together that are immutable, decentralized, and unbreakable in nature. AMPL has proven it functions as a durable unit of account, but it obviously fell short of being a true SoV.
Remember, AMPL is just like Bitcoin — only with a rebasing mechanism that moves volatility to supply. Both assets are an appropriate medium of exchange, but neither solved the problem of being a stable SoV- the final missing property to become true money.
What AMPL did achieve was an improvement on Bitcoin’s model because it does introduce vastly improved qualities as a unit of account.
Because of AMPL’s enhanced qualities and mechanics, ButtonWood was able to develop a protocol that segmented AMPL’s risk to create a superior collateral set for SPOT. This is why the rebase mechanism is so important.
Think of it like an immutable, decentralized central bank that is able to adjust the supply of the asset automatically and without fail depending on the demand for said asset. That is AMPL.
This isn’t possible to achieve with traditional off-chain collateralized stablecoins like USDC, BUSD, or USDT.
This also wasn’t possible with decentralized attempts like Terra Luna’s UST token as it:
- Artificially attempted to remove volatility from its stablecoin
- 2. Required continuous growth of the protocol and repeated bailouts by the Terra Luna Foundation to achieve functionality and maintain its peg
SPOT requires neither of these things to achieve its own SoV properties while also insulating holders from purchasing power degradation.
Just as AMPL can rebase effectively down to zero users without losing its unit of account, SPOT can wind down to zero users without the need for bailouts — ensuring it is not susceptible to bank runs.
What I own in SPOT I will always be able to redeem for the equivalent collateral. This opens up seemingly unlimited use cases within the blockchain ecosystem and beyond.
So, the combination of the SPOT, AMPL, and ButtonWood protocols led to a superior currency in SPOT that meets all of the properties necessary to become viable money.
Summary
With knowledge of how crypto as a concept has yet to deliver true value to the world on a global scale, and knowledge about the mechanics behind SPOT that make it viable decentralized money, it becomes possible to understand the immense value that SPOT can deliver in solving real world problems surrounding currency degradation and centralized control.
SPOT is an advanced form of money, one that requires no intervention on the part of centralized entities to ensure it functions within its economic scope.
It is resistant to the pressures of inflation, something that has plagued every fiat currency in the world, due to the unique properties of the AMPL token.
It is resistant to bank runs due to the mechanisms powering its automated collateral roll-over, ensuring that SPOT is insulated from market volatility continuously as its collateral set matures and is refreshed.
This is what was needed to provide a viable decentralized currency that could help the blockchain economy achieve Satoshi Nakamoto’s vision as a fully realized alternative financial system.
Looking Forward
In the third installment of this series, I will analyze SPOT’s market performance since its launch. This will provide an overview and summary of SPOT’s SoV properties in action on the market for investors and current stablecoin users.
For week to week content on SPOT / AMPL, follow the Documenting AMPL Twitter Page.
