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SPOT is an Ampleforth foundation project and it is the culmination of a five-year-long journey. The project started with the simple goal of producing a decentralized asset that 1) serves a real purpose in the long-run, and 2) works in the long-run. We never imagined how challenging it would be to navigate this intersection, but it is our great privilege to finally share with you the journey of ideas that brought us here.
We began by asking, "What sort of money should we create? What might a better money even look like?" The answer was simple and its explanation well-trodden. A better money would be stable, inflation-resistant, and it would not rely on bailouts. Such a thing would be free from the so-called “moral hazard” that limits fiat monies and therefore serve a long-term purpose—done and done.
Answering the question "how do we make it work long-term?" proved to be much harder. We were convinced by Kydland, Prescott, and the body of intellectual work known as Economics, that our "no-bailouts" constraint had to hold. But this constraint became a hard line that separated us from other projects, making our work significantly harder to relate with, and significantly more difficult to pull off. We hit a wall immediately.
Internally, we used a simple thought experiment to evaluate ideas. We asked, "can the system survive a secular decrease in demand?" That is to say, we evaluated, for every design in question, what happens if markets suffer a sudden significant downturn and remain at a depressed level indefinitely.
Realizing that all existing stablecoin models relied on continuous growth and performed catastrophically in the face of sudden secular decreases in demand, we abandoned crypto-backed reserve approaches in 2019. Instead of a stablecoin we created AMPL, a decentralized unit of account.
The virtue of AMPL is easily seen if you imagine a world with only Bitcoin. Assume all else is dust and ash. Although extremely durable and unreliant on bailouts, Bitcoin is too volatile for long-term contract denomination. This means as a basic building block it can't be used to denominate say an annual salary (ie: agreeing to pay an employee 10 btc per year would be silly) or a 3-year car loan, much less a 15-year mortgage. Needless to say, this inadequacy severely limits the functionality of Bitcoin as a money.
AMPL is similarly volatile to Bitcoin (except in the quantity of units rather than price per unit), however using AMPL one can denominate long-term contracts. Moreover it is similarly durable to Bitcoin in this most important sense that it can function through extreme market conditions without ever requiring bailouts, and has done just that. The design of AMPL stingily introduces but one additional risk, the oracle risk, then immediately and absolutely minimizes this risk to the very brink of inconsequence.
Of course, we do not live in a world with only Bitcoin. Not everybody holds the belief that bailouts and centralization defeat the point of sovereign independent monies, though they should. And not everybody could see that these existing designs would be forced to either centralize or fail catastrophically. The explanations for why we ought to hold these views were admittedly long. Even worse, the purveyors of opposing beliefs were highly-incentivized, deep-pocketed, faster than reasonable thought, and loud. The market, lacking context on that which is irresponsible and that which is pointless, struggled to understand AMPL even while clamoring to buy it. They couldn't imagine why anyone would bother introducing stable denomination, without stable value storage. We pressed on anyways.
For years we believed that AMPL was as far as one could take decentralized money without introducing centralization or mechanisms that would inevitably result in catastrophe. We watched, as you did, the fast collapse of crypto-backed stables. We watched, as you did, the abortive concession of turning to USDC as collateral. Except having painfully proven to ourselves already that these outcomes were inevitable, from our vantage point what took place could only be seen as reckless insanity.
Then one day, our academic advisor devised an ingenious application of AMPL's unit-of-account feature—tranching. Specifically in this case, the resegmentation of risk into one or more derivative assets with different volatility profiles. Tranching itself wasn't a new concept by any stretch, but there was something qualitatively different and important about the ButtonTranche approach. It was transparent, allowing all risk to be priced. It didn't rely on any oracle. It didn't rely on liquidations. And it was completely modular. The same advisor even posited that low volatility senior AMPL tranches could be used as safe-asset collateral by the issuer of a stable store of value. The sheer flexibility and durability of this new tool would eventually inspire us to revisit our original goal.
Returning to the task of creating an instrument of long-lived purpose that doesn't inevitably rely on bailouts, we framed the problem more simply and yet more completely. We accepted as fact that no asset can promise stability forever. From this starting point we asked, "how long must an asset be capable of preserving stability for in order to matter?" Well considering the timeline of inflation, we just needed something that could function as a refuge on the order of decades and centuries. Fundamentally however, there needed to be an ever-present threat of future capital flight to inflation-resistant stable alternatives, to check against existing systems. It couldn't be designed to simply hold stability for a long-while and then explode or stop.
We needed a system capable of holding long periods of stability that would bend safely, rather than break catastrophically in the face of black swan market events. And this system needed to be designed such that it would always be capable of resuming stable value storage after a disruption, without requiring bailouts. The problem, at least, never looked clearer.
In the summer of 2022, we sketched out the SPOT protocol. As our advisor proposed, SPOT would use low-volatility senior AMPL tranches as collateral for stability. But there was still one glaring obstacle standing in our way. The trouble with senior AMPL tranches is they automatically mature into raw AMPL after a predefined period. So our challenge would be to create a "perpetual" senior AMPL tranche, by designing a system that incentivizes the rotation of maturing tranches out, in exchange for fresh tranches in.
What we didn't realize at the time, was that this irksome byproduct of the ButtonTranche protocol, would end up becoming a core feature of the system. Automatic tranche expiration was the key to graceful degradation. Like ice progressively melting into water during a heat wave, senior AMPL tranches would progressively mature into raw AMPL under extreme market stress as rotations halted. And like water progressively freezing into ice after a heat wave, raw AMPL would be rotated out for senior tranches after a shock settles, as rotations resumed. Consequently, when faced with extreme market turmoil the price of SPOT would become temporarily more volatile, bending safely rather than breaking catastrophically, and the system would thereafeter be able to resume stable value storage—done and done.
The market still lacks context on that which is irresponsible and that which is pointless. We still need to cut through the noise. We again need your help. This time however, we've spared everyone the anguish of differentiating between a stable store-of-value and stable unit-of-account. Though the solution may appear stranger than fiction, the proposition is simple. If helpful, you might simply consider SPOT a very first proof that blockchain technology can be used to solve a problem of substance, that otherwise truly could not be solved—inflation.
We're in the end game now.