Ampleforth and Balancer Create USDC-AMPL 'Smart Pool'

In brief

  • Ampleforth and Balancer have launched a new USDC/AMPL liquidity pool on Balancer with a dynamic token ratio.
  • The liquidity pool will automatically adjust the required ratio of AMPL to USDC based on the changing AMPL supply.
  • AMPL supply changes daily, in a design intended to replace price volatility with supply volatility.

Ampleforth, the protocol that popularized rebasing currencies, has teamed up with liquidity protocol Balancer to create a rebasing smart pool for liquidity.

It announced today the launch of a new USDC/AMPL liquidity pool on the Balancer protocol that allows users to earn fees from providing USDC and AMPL tokens to facilitate swaps between the two. 

Ampleforth runs the dollar-pegged AMPL, a “supply elastic digital currency” pegged to the dollar but with a supply that changes daily to account for swings above or below the dollar mark. It adjusts the AMPL supply based on the market cap, or the combined value of the entire token, to try to maintain a price-per-token of $1. 

That’s the goal at least. The currency has regularly broken away from its dollar peg, rising as high as $3.83 in July and falling as low as $0.56 in August.

The new USDC/AMPL pool will add USDC to the mix. It will dynamically adjust the required ratio of USDC dollar-pegged stablecoins to AMPL tokens. If the price of AMPL is above a dollar, the supply will be increased to lower the value of each individual token. If the price is below a dollar, the supply will decrease to boost the value of the individual remaining tokens.

But why?

When users provide liquidity to pools on decentralized exchanges like Uniswap that use an automated market-maker (AMM) to determine prices, they risk exposure to impermanent loss. Impermanent loss happens when assets in a pooled pair change significantly in value from their original ratio. 

Since AMMs don’t use price oracles, token swap price ratios only change as a result of traders buying tokens from pools at prices lower than other exchanges. After this happens repeatedly, however, that price differential disappears. 

Each of these trades, known as arbitrage, take a fraction of the traded token’s value as a kind of hidden fee for helping correct AMM asset prices. Typically, AMMs like Balancer and Uniswap give trading fees back to liquidity providers to make up for impermanent loss and, in favorable conditions, earn a profit.

The new rebasing pool seeks to get rid of impermanent loss altogether. That’s where Balancer assists. Balancer, an AMM like Uniswap, can dynamically adjust the ratio between tokens in a liquidity poolwhere Uniswap pools are fixed at 50/50, Balancer pools can be changed up to 99/1 and anywhere in between.

“Since Ampleforth shifts volatility from price to supply, and supply changes at a particular point in time, Balancer can update the smart pool weights at the same time, thus removing all impermanent loss associated with supply changes,” Ampleforth co-founder and CTO Brandon  Iles told Decrypt. “This makes impermanent loss with AMPL truly impermanent.”

If the price difference between the pooled assets is reduced or eliminated by additional price action, the arbitrage trades are made in reverse, eliminating the loss to the liquidity provider.

Therefore, by combining the Balancer and Ampleforth mechanisms, impermanent loss can be eliminated.

Impermanent loss is a consideration unique to decentralized exchange liquidity providers, the result of new approaches to the question of how best to fairly trade one asset for another. If the new USDC/AMPL pool is effective in eliminating or reducing impermanent loss from the liquidity providing equation, it could generate significant demand for AMPL and other elastic supply assets like it.