Supply elasticity is a property of money that allows the supply to expand and contract on an as-needed basis in order to meet demand. Well established monies like gold, as well as modern age cryptocurrencies like bitcoin and ethereum, do not have this property.
Their supplies are largely fixed, and deliberately so. Most bitcoin and gold proponents would argue this is a good thing, and it does have its benefits when compared to fiat.
But on closer inspection, wouldn't it be better for the money supply to expand roughly at the same rate as the population?
Fiat monies like the US Dollar do have a changing supply that is constantly increasing. However, it never decreases even when demand falls, and for that reason, it is not elastic. This has led to fiat completely crashing in places like Venezuela and other countries with runaway inflation.
An elastic supply can both increase and decrease as needed to prevent a total collapse. Additionally, most fiat monies do not try to keep up with demand, but instead try to outrun demand, causing inflation and the devaluation of a single unit. The current target for USD is 2% inflation per year.
What if the supply could expand and contract in response to real market demand, and a single unit was worth the same amount today as in the year 2120, and 3120 and beyond?
This is the concept pursued by the Ampleforth project being built on Ethereum. Ampleforth is a non-dilutive non-fiat decentralized elastic-supply permission-less money. Whoa, that's a mouthful, let's break it down. It's non-dilutive, your percentage of the total supply will always remain constant.
Non-fiat, fiat means "money by decree". No government is needed for this system. It is neutral money for the people of the world. Decentralized, no one entity controls it. Elastic supply, it can grow and shrink to meet demand. Permission-less, anyone can create an ethereum wallet and start using it without needing any permission from a bank or anyone else. Money, medium of exchange, unit of account, store of value.
Ampleforth is implemented as an ERC-20 token and a series of smart contracts that algorithmically adjust the supply based on the current price which is supplied by on-chain oracles.
The system is set up to track the 2019 US Dollar, based on the CPI inflation-adjusted price. It does this by getting price feeds from decentralized oracles provided by Chainlink, which is used to adjust the supply as needed to meet demand.
Whenever the price goes above a certain threshold, currently about 5 cents above the target, then the supply is increased ever so slightly. However, unlike traditional fiat currencies, the new supply is not given to the founders or the people in control.
Instead, it is evenly and automatically given directly to the people. In this way, nobody is diluted by expansion or contraction of the supply, and we avoid the downfalls of the Cantillion effect. You get the non-dilutive quality that gold and cryptocurrencies have, and some of the elastic properties of traditional fiat all in one completely fair and balanced censorship-resistant system.
The project was started back in 2018 and they've been building out the protocol and network ever since. Whereas most ethereum projects that were born in the 2017 and 2018 bull run have faded away, this one, along with many other DeFi projects, is just starting to catch on.
The team behind Ampleforth hails from some of the top universities and tech companies in the world, and some of its backers include Brian Armstrong of Coinbase, FBG Capital, and others.
They are currently the most liquid and voluminously traded cryptocurrency on the decentralized exchange uniswap. The volume actually rivals that of the centralized listings, which may or may not be real volume. DEX volume cannot be faked, it's all on-chain and visible, and there is no real incentive to wash trade. Wash trading on centralized exchanges is completely free and is used by exchanges to try and attract more users.
So what's all the fuss about? Well, the elastic supply and relatively stable price dynamic make for some interesting market dynamics. It does not trade like traditional cryptocurrencies or any asset for that matter.
Instead of price discovery, what we have is marketcap discovery. At some marketcap, the price will comeback down to it's target of $1, at which point it should stabilize. There will likely be a period of contraction, until enough new traders see the opportunity to get in cheaper and bring the price back up.
In this way, it's actually possible to enter into the market at a higher price than you exit, and still be profitable. This is exactly my first experience with this market.
I bought a small amount, came back in a week to check the price, thought I lost money, only to check the amount of coins I had and realized I have more than doubled my money.
How can this be?
It's the magic of supply elasticity, and it has the potential to flip the cryptocurrency market on its head.
One theory is that the relative price stability allows the system to bypass a psychological barrier in most people that prevents them from buying something that is thousands of times more expensive than it was a few years ago.
New entrants are never going to feel like they are vastly overpaying for the asset. And yet, holders will still gain the benefits of being apart of a growing new digital asset.
Compare this to something like bitcoin that is currently trading at 1,000,000 times its initial market price. Yes, that's right, one million times. It was originally traded for around $0.01 on some of the very first exchanges such as Mt. Gox.
This is how Lazlo was able to famously spend 10,000 bitcoins on a single pizza. In fact, the price he paid was even less than $0.01 per bitcoin in that transaction. Now the price is close to $10,000.
When Satoshi Nakamoto gifted bitcoin to the world, it changed the world of money forever. When Vitalik and co-created Ethereum, they opened up the gates for anyone to experiment and create new digital assets with different monetary properties.
It was only a matter of time that a new digital asset emerged on Ethereum with fundamental properties that make it more tenable to become a global reserve currency.
Add on the fact that Ethereum is hard at work to make the base chain more scalable and accessible to billions of users, it's only a matter of time before bitcoin is dethroned.
Bitcoin will always have a place in the economy as digital gold, as will physical gold, but everyday spending will almost certainly be won by some kind of elastic supply currency, and Ampleforth appears to be the first such currency. It surely won't be the last, but it does have the first movers advantage.
If you're interested in learning more about the project you can visit ampleforth.org. Check out the dashboard, the staking page, and then head over to uniswap to buy some and experience your first rebase. Read the red paper to learn more about the protocol of monetary policy and theory. Jump into the telegram to ask questions and enjoy the memes.
(Disclosure: I own ampl tokens)