- What is SPOT?
- How can SPOT have no band?
- What is the benefit of having no band?
- What makes SPOT stable?
- How does AMPL work?
- How does tranching work?
- How are tranches bundled?
- How does SPOT degrade and resume gracefully?
- How can SPOT be valuable if the system can resume stability at higher or lower multiples of its original price?
- How can SPOT support extremely long-lived periods of stability?
- What drives SPOT's rotation demand?
- How does SPOT's price map to the inflation-adjusted dollar?
- How can SPOT act as a refuge from inflation if it can experience debasement?
- How does SPOT fit into a multicollateral system?
- What are the biggest risks of the SPOT protocol?
Spot Protocol FAQ
In this section we've answered the most important questions about the SPOT protocol. We find that by reading the questions and answers below, in order, folks walk away with a very strong understanding of the protocol, and we highly recommend giving it a read.
1. What is SPOT?
SPOT is an inflation-resistant stable asset that is configured to support extremely long-lived periods of stability. The system is designed to bend safely rather than breaking catastrophically in the face of extreme market conditions, and then later resume its function of stable value storage afterwards, without reliance on bailouts.
SPOT can be held directly as a refuge from inflation, used as a peer-to-peer digital cash, or used as alternative collateral asset to USDC within existing reserves. Unlike today's other decentralized solutions that operate healthily only within a discrete range or "band" of prices and collateralization-ratios, SPOT has no limited band of operation and functions continuously across all market scenarios.
2. How can SPOT have no band?
The SPOT token is just a proportional claim on a basket of collateral assets. There are no price or collateralization ratio ranges or “bands” that trigger different modes of operation (like liquidations beneath a certain collateralization-ratio or debt-issuance beneath a certiain price point). Unlike other systems, SPOT has only one mode of operation: Proportional Redemption, and this functions continuously across all price points. Let's illustrate with a simple example:
Imagine Alice holds 1% of all SPOT tokens. At any time she can redeem her SPOT tokens for 1% of the assets in SPOT’s basket of collateral.
- If the value of the assets in SPOT’s collateral set goes up, the price of SPOT will go up because each SPOT token is redeemable for more value.
- If the value of the collateral goes down, the price of SPOT will go down because each SPOT token is redeemable for less value.
The price of SPOT is free floating and will simply reflect the market value of its redeemable collateral. At no point will the price of SPOT affect Alice's ability to redeem. Read What is the benefit of having no band? to learn about why this matters.
3. What is the benefit of having no band?
The benefit of having no band (ie: one single continuous mode of operation across all scenarios) is the system has no bank-run conditions.
Bank run scenarios present when there is a clear opportunity for faster acting users to withdraw better assets than slower acting users. For example, if a bank has limited collateral on hand and those who redeem first receive the best assets in the system, while those who act last face insolvency, a race to redeem can take place.
Rather than introducing conditions that can spur a race to insolvency, SPOT employs free floating price and proportional redemption.
- Free-floating Price: The price of SPOT can be any value because SPOT is just a one-directional claim on a basket of assets. Just as the price of Bitcoin can occupy any number without breaking the system, so can the price of SPOT.
- Proportional Redemption: Means the composition of collateral remains the same before and after any given redemption, so the value of SPOT remains the same even as users withdraw to an empty set. Just as Uniswap-V2 LP tokens can safely unwind to an empty set, so can SPOT.
The combination of free-floating price and proportional redemption means at any time, regardless of market conditions, users of SPOT can always hold, sell, or redeem spot without triggering a race to zero.
4. What makes SPOT stable?
Based on our answers to How can SPOT have no band? and What is the benefit of having no band? you might be wondering:
- “If the SPOT token is just a free floating proportional claim on a basket of assets, then isn’t the token only stable if the assets in the collateral basket are stable?”
That is exactly right, SPOT can only be stable if its collateral is stable. The SPOT protocol uses a stable derivative of AMPL (Senior AMPL Tranches) as collateral. And the process of safely extracting a stable derivative from AMPL has two steps:
- Tranching: Volatility can neither be created nor destroyed, but it can be resegmented. Tranching is the process of resegmenting the volatility of underlying collateral into junior (higher volatility) and senior (lower volatility) derivatives.
- Bundling: Is the process of combining lower volatility senior tranches into a perpetually rotating collateral set.
To understand the stability of SPOT's collateral set in greater detail, read on below to learn how AMPL, tranching, and bundling work.
5. How does AMPL work?
AMPL is the underlying collateral asset used in the SPOT system. AMPL’s key distinction is that its price targets the CPI adjusted dollar and can thus, in addition to being a collateral asset, can be used as an inflation-tracking unit of account.
Think of AMPL as a price-stable but supply-volatile cryptocurrency. Rather than price increasing and decreasing with demand, the quantity of tokens in user wallets increases and decreases with demand.
Above we show the difference between price expansion and supply expansion. On the left, as demand increases the price of a token increases correspondingly. On the right, as demand increases, the quantity of units increases but the price per unit remains constant.
In practice, the automatic process of adjusting supply in response to demand takes time to find equilibria, but the long-run result is a price-stable but supply-volatile cryptocurrency.
6. How does tranching work?
SPOT uses an open tranching protocol called Buttonwood Tranche to resegment the underlying volatility of AMPL into senior and junior tranches.
- Senior Tranches: Are more insulated from supply volatility than their underlying collateral asset. They are debt-like instruments than can be used as stores of value.
- Junior Tranches: Junior tranches are more volatile than their underlying collateral asset. They are equity-like instruments that capture the bulk of changes in underlying asset growth.
The Buttonwood Tranche protocol accepts as its inputs:
- A Balance of Rebasing Collateral: A deposit of underlying tokens (like AMPL) that can be used as collateral and unit-of-account
- Maturity Date: A future date & time at which tranches mature and become redeemable for the underlying
- Tranche Ratios: A list of values, adding to 1, that determines the distribution and order with which supply changes propagate to two or more tranche tokens.
And Buttonwood Tranche always obeys the following rule:
- Conservation of Collateral: The total sum of AMPL tokens for which senior and junior tranches can be redeemed at maturity will always equal the number of AMPL that would have remained if the AMPL collateral were simply held over the same time period.
To help put these rules into context, we'll cover three examples below here.
6.1 Tranches Under Supply Expansion
When the underlying AMPL network’s supply expands beyond the amount initially deposited, the excess AMPL accrues only to the junior tranche. In the figure below, the junior tranche benefits from the underlying expansion, while the senior tranche is unaffected.
- Expansion Example (before): Imagine we have a tranche initialized with 30 day maturity and a tranche ratio of (80, 20) (junior to senior). If Bob deposits 1000 CPI-adjusted dollars worth of AMPL, he will receive 200 senior tranche tokens and 800 junior tranche tokens.
- Expansion Example (after): Let’s say the AMPL network doubles in size over the 30 day period. In this case, Bob’s senior tranche tokens will still be redeemable for 200 CPI-adjusted dollars worth of AMPL, but his junior tranche tokens will be redeemable for 1800 CPI-adjusted dollars worth of AMPL.
6.2 Tranches Under Supply Contraction
When the underlying AMPL network supply contracts beneath the amount initially deposited, the supply reduction affects junior tranches first before senior tranches are affected. In the figure below, the underlying supply contraction propagates only to the junior tranches.
- Contraction Example (before): Imagine we have a tranche initialized with 30 day maturity and a tranche ratio of (80, 20) (junior to senior). If Bob deposits 1000 CPI-adjusted dollars worth of AMPL, he will receive 200 senior tranche tokens and 800 junior tranche tokens.
- Contraction Example (after): Let’s say the AMPL network halves in size over the 30 day period. In this case, Bob’s senior tranche tokens will still be redeemable for 200 dollars worth AMPL, but his junior tranche tokens will only be redeemable for 300 AMPL.
6.3 Tranches Under Extreme Supply Contraction
When the underlying AMPL network supply contracts beneath the senior tranche ratio, positive expansions first restore senior tranches (behaving like AMPL) before expanding only to junior tranches.
- Extreme Contraction Example (before): Imagine we have a tranche initialized with 30 day maturity and a tranche ratio of (80, 20) (junior to senior). If Bob deposits 1000 CPI-adjusted dollars worth of AMPL, he will receive 200 senior tranche tokens and 800 junior tranche tokens.
- Extreme Contraction Example (midpoint): Let’s say the AMPL network falls by 90% in the first 15 days. At this point Bob’s senior tranche tokens appear like they will be redeemable for 100 dollars worth AMPL, his junior tranche tokens appear like they are redeemable for 0 AMPL, but the maturity period hasn’t elapsed yet.
- Extreme Contraction Example (after): And then let’s imagine the AMPL network expands by 50% before the end of the 30 day maturity. Bob’s senior tranche tokens are now redeemable for 150 dollars worth AMPL, his junior tranche tokens are redeemable for 0 AMPL.
7. How are tranches bundled?
The SPOT collateral set uses only senior AMPL tranches (safe-assets) as collateral. Junior tranches can be held or sold by SPOT minters at their discretion, they are not included in SPOT’s collateral. Please see How does tranching work? to understand tranching in general.
Senior tranches can be used to store value for their maturity period but they are not fungible across vintages because different vintages mature at different times. To address this, senior tranches are “bundled” into a rotating collateral set of senior tranches.
- Rotation: is the process of withdrawing maturing senior tranches in exchange for depositing fresh senior tranches. These rotations are upheld by a simple system of incentives that reward users for withdrawing and depositing senior tranches.
You can think of SPOT as a perpetual senior AMPL tranche. The price of SPOT will reflect the redeemable value of the senior tranches in the collateral set.
Note that even if one or more senior tranches in the collateral set becomes impaired (ie: the underlying AMPL network contracts beneath the senior tranche ratio within the maturity period) there always exists an equilibrium price of SPOT that reflects the redeemable value of the senior tranches.
8. How does SPOT degrade and resume gracefully?
Timely rotations ensure that the SPOT collateral set is full of fresh senior AMPL tranches which are heavily insulated from volatility. But what happens with rotation demand is insufficient?
- The senior AMPL tranches naturally and progressively degrade into the their underlying asset (AMPL).
You can think of this as similar to ice and water. Imagine you have a voucher that is redeemable for a percentage of ice in a freezer. Continuing with this metaphor, If the refrigeration process halts (ie: rotations halt) your voucher (the SPOT token) becomes redeemable for a combination of ice and water until the refrigeration process resumes, after which the water progressively freezes back into (and is redeemable for) ice.
Since each vintage of senior AMPL tranches is offset by a fixed time-window, when rotations halt, the SPOT token becomes redeemable for a combination of raw AMPL and senior tranches. The longer rotations halt for the greater the fraction of redeemable collateral is raw AMPL until rotations resume.
As more senior AMPL tranches mature into raw AMPL the price of SPOT will become temporarily more volatile because AMPL is more volatile than senior AMPL tranches.
Similarly, as rotations resume the price of SPOT will become more stable again because senior AMPL tranches are heavily insulated from underlying AMPL volatility.
This process of degrading and resuming is continuous rather than discrete. The system “bends” safely rather than “breaking” catastrophically. More specifically, rather than triggering bank-runs, insolvency or cascading liquidations, while under extreme stress the SPOT token simply becomes temporarily more volatile, and can resume stability in the future without bailouts.
If rotations partially or temporarily halt, the SPOT token can recommence stability when rotations resume. The effect on SPOT's price-series over time would be similar to the diagram below:
However, even if rotations halt for an indefinite period of time and the SPOT token becomes entirely a claim on raw AMPL, the system can resume at any point in the future once rotations resume, at a different multiple of the original CPI-adjusted price.
Read on to learn How SPOT can be valuable if the system can resume stability at higher or lower multiples of its original price.
9. How can SPOT be valuable if the system can resume stability at higher or lower multiples of its original price?
Recall that no synthetic asset can guarantee stability forever. To think long-term is to accept this fact, and ask how one might design a long-lived system that can survive black swan market events.
A system that remains stable for 2 days, bends due to a disruption, and then resumes at a different multiple would not be very valuable. However a system that remains stable for 200 years, bends due to a disruption, and resumes at a multiple would be extremely valuable and capable of functioning as a refuge from central bank inflation.
Although the promise of stability forever is unrealistic, the prospect of long epochs of stability (on the order of decades or even centuries) is very realistic, macroeconomically valuable, and now achievable through SPOT.
Read on to learn How SPOT can support extremely long-lived periods of stability.
10. How can SPOT support extremely long-lived periods of stability?
The SPOT design optimizes for long-term stability over near-term stability by granting the market a maximum window of opportunity to “recover” from extreme market disruptions. To “recover” after a market disruption, the system needs to return to a state where:
- Senior tranches are strongly collateralized
- Rotations occur in a timely and continuous manner
In this section we’ll cover senior AMPL tranche configurations to give a sense for how likely disruptions are to occur. In the next section (What drives SPOT’s rotation demand?) we’ll cover the system of rotation incentives to give a sense for how likely the system is it to experience any disruption to rotations.
Fortunately, the AMPL supply policy is deterministic (ie: the network can only expand or contract at a bounded rate) so we can calculate the system’s tolerance concretely. Recall that AMPL transfers the volatility of demand from price per token to the quantity of tokens in user wallets.
The rate of AMPL contraction is currently bounded at 7.77% per day. Thus, an entirely debasement-proof tranche maturity length can be computed as follows:
Based on current configurations, the AMPL network can contract at a price of $0 for ~19.89792 days before senior AMPL tranches begin to be impacted, but the bond length is currently configured to 28 days. This means that although the likelihood of AMPL price falling to $0 is extremely small, it is still mathematically possible for senior AMPL tranches to become impaired.
However, given that 1) AMPL supply has never contracted more than 52% in a 28 day period, and 2) even in the case where senior AMPL tranches in the collateral set become impaired the system does not suddenly break—we have elected to support a 28 tranche maturity period for a balance of safety and capital efficiency.
In short, it is extremely unlikely that senior AMPL tranches get impaired based on the current configuration. Moreover an update can implemented through governance to make it mathematically impossible for senior AMPL tranches to become impaired within the configured duration period by setting the max contraction rate of AMPL to 5.5% per day.
11. What drives SPOT's rotation demand?
Rolling over is the process of withdrawing senior AMPL tranches that are nearing maturity and depositing an equal value of AMPL tranches from the active minting tranche.
Timely rollovers ensure the system is maximally insulated from supply changes and thus stable. To incentivize rollovers, the system pays a percentage-based reward to AMPL holders who stake their AMPL in service of this network task. There are two primary rollover incentives:
- Rollover rewards: A percentage based fee reward for staking AMPL used to service rollovers.
- Voting power: A share of the yearly FORTH gov token inflation for locking the underlying assets in escrow to service rollovers
Rollover fees come from two sources:
- Fee Buffer: A balance collected from minting and redeeming fees.
- New Emissions: Rewards from new SPOT emission. Once the fee buffer is exhausted, rewards come from emission.
11.1 General Reward Case
The general reward case pays out from the Fee Buffer which is a balance of SPOT collected from minting and redeeming fees.
- Example 1: Imagine Alice rolls out R fully collateralized tranches representing 1% of the collateral set value, and rolls in R fresh tranches. If the SPOT supply is 1M, the SPOT denominated value Alice rolls over is 1% of 1M = 10,000 SPOT. If the rollover reward is 2%, Alice will receive 200 SPOT as reward for her work.
If the Fee Buffer is exhausted the rollover reward comes from new SPOT emissions:
11.2 Emission Reward Case
- Example 2: Imagine the same Alice rollover example as above. Alice is owed 200 SPOT, but there are only 100 SPOT remaining in the fee buffer. Alice will receive those 100 SPOT plus 100 freshly minted SPOT.
Emission rewards have the effect of diluting SPOT holders (effectively debasing SPOT), but only by a rule-bound, constant, rate. We regard a fixed k% emission system to be perfectly acceptable (see FAQ answer 13) but have currently launched with rewards and emissions set to 0%. Emission rewards will later be enabled through governance.
12. How does SPOT's price map to the inflation-adjusted dollar?
We mentioned above that SPOT is a freely redeemable claim on senior AMPL tranches. Because these senior AMPL tranches are heavily insulated from the underlying asset’s supply volatility, a claim on senior AMPL tranches can be thought of as a claim on future AMPL. For this reason, you can think of holding X senior AMPL tranches with 28 day maturity, as similar to holding X future AMPL tokens that are insulated from volatility for a period of 28 days.
Since an X SPOT claim is a claim on X future AMPL, and the price of AMPL targets the CPI-adjusted dollars, an X SPOT claim tends to be worth X CPI-adjusted dollars. In shorthand:
- X SPOT → X future AMPL
- 1 AMPL → 1 CPI-adjusted dollar
- X SPOT → X CPI-adjusted dollars
Now you might be wondering why 1 future AMPL will always be worth 1 CPI adjusted dollar. Recall that AMPL merely translates the volatility of demand from price per token to the quantity of tokens held in user wallets. For this reason regardless of market volatilty the long-run price of AMPL will always revert to 1 CPI-adjusted dollar. For the avoidance of doubt, please see the AMPL price history chart through extreme market conditions.
For example, in the depicted period demand for AMPL increased by as much as 84,736% and decreased by as much as 93%. Still, the price of AMPL reverted to 1 CPI- adjusted dollar.
13. How can SPOT act as a refuge from inflation if it can experience debasement?
Central banking authorities like the Federal Reserve have what is commonly referred to as a dual mandate “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” This means their prerogative extends to caring for the broader economic health of the state. However, periods of monetary loosening to spur demand and create jobs often require subsequent tightening to curb inflation and restore stable prices.
One of the challenges presented by this difficult, but important, balancing act, is predicting the amount of time it takes to bring inflation back in line. For this reason price-inflation can run away for indefinite periods of time. The clearest opportunity presented to a monetary system that is disconnected from any single state, is the opportunity to limit its prerogative to that of maintaining relatively stable prices.
SPOT can go for long periods of time without experiencing debasement. But in the event that it does, SPOT debasement is rule-bound, predictable, and solely in service of bearing the cost of rotations. In this sense SPOT is disconnected from global money printing cycles and can function as a refuge from central bank inflation—much as Friedman’s k-percent rule proposed that the money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles.
14. How does SPOT fit into a multicollateral system?
SPOT can be used as an alternative collateral asset to USDC to dampen volatility within existing systems (like DAI) sitting alongside ETH and other crypto assets.
Moreover, we expect to build multiple SPOT-like perpetual systems that use different underlying base-assets as collateral (ie: tranched ETH, tranched BTC).
Although there are distinct advantages to using AMPL as the underlying base-asset, an ETH-SPOT would be strictly better than existing ETH collateralized stablecoin solutions in the sense that it would be 1) non-runnable, 2) free from cascading liquidations, and 3) capable of safely winding down to zero users without bailouts.
Advantages of using AMPL as a base-asset include:
- Deterministic Supply Policy: AMPL’s deterministic supply policy makes it straightforward to estimate, price, and even eliminate the likelihood of senior tranche impairment.
- No Oracle System: AMPL’s built in price target absolutely minimizes oracle risk and man in the middle attacks.
- Mutually Stabilizing Interaction Effects: Because the long-run price of AMPL is always 1 (2019 CPI-adjusted) dollar, it is straightforward to implement a strategy that buys SPOT (a claim on future AMPL) under the AMPL price target and sells SPOT over the AMPL price target (eg: arbitrage) so long as there’s little to no risk of senior tranches becoming impaired within the maturity period. This countercyclical demand propagates through mint/redeem arbitrage into countercyclical demand for AMPL, which organically stabilizes AMPL and thus SPOT in a virtuous cycle.
15. What are the biggest risks of the SPOT protcol?
We’ve established above that SPOT 1) has no catastrophic breaking points with respect to price and collateralization ratio, 2) is non-runnable, and 3) can degrade / resume gracefully without bailouts.
Nonetheless, the value of the system is connected to how long its epochs of stability are, relative to its periods of volatility (see FAQ question 7). The most important consideration to draw attention to here is:
- The relative size of SPOT’s circulating supply and AMPL balances in the rollover vault
Recall that SPOT becomes volatile when there isn’t enough AMPL capital to facilitate rollovers. The (80, 20) (junior, senior) tranche configuration asserts that it takes 5 AMPL to retranche and rollover 1 SPOT. For this reason the circulating market cap of AMPL places an upper limit on the total market cap of SPOT. Thus it’s important to consider:
- How quickly SPOT’s total market cap scales relative to AMPL’s
- How much rollover capital exists in the vault
There is a risk that AMPL grows too rapidly, the total supply of SPOT grows correspondingly, and then AMPL shinks rapidly making impossible to rollover the total supply of SPOT. In this case SPOT would enter a period of volatility and stabilize at a new equilibrium price (a multiple of the AMPL target). Although this doesn’t break the system, we don’t want it to happen prematurely. For this reason SPOT’s maximum supply is capped by a governance controlled mint ceiling parameter to prevent unsustainable growth. In the early stages, some discretion needs to be applied to rates of growth between the two assets.
The amount of rollover capital available will be made evident by AMPL balances in the rollover vault. As such, the market can apply a discount or premium to SPOT’s price based on the amount of publicly visible rollover capital in the vault.