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Here we answer a few of the most common high-level questions about the SPOT protocol. For more a more in-depth understanding see the documentation.
Zero-liquidation tranching is a safe method of resegmenting the volatiliy of an asset into two or more derivative asests that have different volatility profiles over a fixed maturity period. These tranches are highly modular and can be used as safe building blocks for constructing more complex systems without any risk of cascading liquidations because all debt is settled up front.
Key Benefits of Zero-liquidation tranching
SPOT uses an open protocol called Buttonwood Tranche to separate the volatily of AMPL into senior and junior tranches. Senior AMPL tranches are more insulated from supply volatility than underlying AMPL. They are debt-like instruments that can be used as stores of value. Junior AMPL tranches are more volatile than underlying AMPL. They are equity-like instruments that capture the bulk of changes in underlying asset growth.
The SPOT protocol uses senior AMPL tranches are collateral. To learn more about tranching see: about Tranching.
Liquidation market based systems rely on continuous demand for leverage on collateral in order to maintain a fixed circulating supply. This makes them very difficult to scale. In such systems, minters lock up capital to create the stablecoin. They constantly pay interest, monitor the position and top up with more capital if they are underwater to avoid losing their position through liquidations.
Unlike these systems, demand for SPOT propagates into network growth. Moreover, once SPOT has been minted it remains in circulation until it is redeemed and does not require continuous demand for leverage. SPOT's supply is freely determined by market demand for minting and redeeming. However, there are natural incentives to mint and redeem SPOT based on the market value of AMPL.
To learn more see the documentation.
The SPOT token is simply a proportionally redeemable continuous claim on a basket of collateral. This means there is no concept of peg-breaking in the system and there are no bank-run conditions. All risk is transparent and presented such that it can be priced by markets into the value of the token.
Moreover, SPOT's collateral is tranched in a manner that progressively degrades into its base-asset (AMPL) under stress rather than triggering insolvency or liquidations. In times of turmoil the system bends safely (becoming temporarily more volatile) rather than breaking altogether.
You can think of degradatin in the SPOT collateral set as similar to a freezer holding ice and water, where ice is a derivative of water. Imagine you have a voucher that is redeemable for a percentage of whatever's 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.
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When the token is redeemable entirely for ice it is stable, but in extreme turmoil if the system is redeeming for a combination of ice and water or just water, it simply becomes temporarily more volatile rather than breaking altogether.
Key Benefits of SPOT's collateral set design
To learn more about how the system works see the documentation.
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