Holding during negative rebases [AMPL - YAM comparason]

Having followed the development of Ampleforth since Fragments I have to say I am very curious to see how the negative rebases play out in YAMv3. Basically, the main difference between the two protocols is that AMPL has stated their intention to remain a non-governed asset, while the YAM token has a governance value added to it, which is of course very subjective.

Captura de pantalla 2020-08-27 a la(s) 17.33.06

I tweeted this today and I would like to expand on my thoughts and get your view on the matter, even though we know that this theory can only be proven in a larger time frame (AMPL is very new and YAMv3 is not even out yet).

The main objective of the rebases is to influence the price of the asset and bind it to a specific target price, in this case 1USD + inflation (AMPL) or 1 flat USD (YAM). However, in AMPL experience we have seen that people are motivated to buy during positive rebases and tend to sell during negative rebases, some may argue that this is a temporary psychological factor due to a misunderstanding of how these new assets should be traded (based on marketcap and not price), however the outcome remains that there are large periods of consecutives positive and negative rebases, which instead of stabilizing the coin’s price it keeps it away from its target most of the time.

It is my belief that this happens because there is no real incentive to hold AMPL during a negative rebase, the rational thing to do it to sell and wait for it to go back above its target price.

In the other hand, YAM has shown to have a great community, the voting process of YAMv2 has been a successful one if you consider the amount of votes and community proposals that have been submitted. This leads me to belief that the governance value of YAMv3 is significant at least to a considerable number of people.

Time will tell how both of these elastic assets will behave, however the added governance value of YAMv3 could very well result in shorter negative rebase periods.

TLDR:
AMPL has no real incentive to be held during negative rebases, the governance aspect of YAM gives it that extra value that could very well make an elastic currency work.

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@Chitty I think you summarized it quite well.

Ultimately, I think it comes down to how much “agency” the token protocol actually has over the population and events it is trying to influence. In this case, we’re talking about market psychology and buying/selling. Drilling even deeper, because sellers always require buyers and vice versa, we’re talking about the inherent protocol mechanics trying to create an inbalance between the number of buyers and sellers, the direction and degree of that inbalance being what pushes the price up or down.

The issue is that the protocol mechanics can only attempt to persuade activity but has no ability to actually force said activity. It can’t make you sell or buy, it can only try to offer incentives to convince you to do so. And for this to work, the mechanics have to be offering the correct incentives.

For AMPL, in the short term, the assumption is that basic textbook supply and demand are sufficiently persuasive to get speculators to act. And we saw that happen with the positive rebase pretty well. It was able to put a strangle on the runaway valuation the token was experiencing pretty quickly, in the grand scheme, and you can see that in the steep price decline in the chart. But if you look at the negative rebase mechanic, it’s impact has been much more subtle and understated. In the chart, we can see that the token has found some semblance of varying equilibrium in the .60-.80 range, below its target price point. And if you look at the supply chart, you can see that the positive rebase mechanic managed to increase the supply much more rapidly and to a higher degree than the negative rebase has been able to deflate it. So the impact of the two mechanics is imbalanced.

The only conclusion I can come to is that the negative rebase mechanic is not providing sufficient incentive to buyers, and to me this, this is derivative of misunderstanding the psychology of the current market. The assumption that a lot of people seem to be making in the AMPL community is that speculators will be inclined to buy the coin once the marketcap is low enough in order to profit heavily once the cycle turns positive again. The a priori assumption is that a positive cycle will be inevitable once this happens. But this can’t be assumed to be true.

I’ve gotten pushback when I say this, from people telling me that they do buy and speculate on AMPL’s price swings. But my counter is that even then, in order to speculate, you still have to sell at the top of the swing. If the swing stays within the range I mentioned above and never triggers a positive rebase, then that speculative activity will only reinforce the sub-target equilibrium, which is not what it’s intended to do.

Additionally, I would argue that the current negative rebase pattern provides a greater incentive to abstain from buying activity until one feels the cycle has reached bottom rather than engaging in slow and sustained buying activity to accumulate while the price finds support, the way one might with a non-elastic coin. Again, the resulting market behavior of the negative rebase mechanic runs counter to the intention and goal of the mechanic.

What makes YAM interesting in comparison, like you pointed out, is the governance factor. Not only does YAM have an elastic cycle beneficial to speculators, but the governance element provides utility not found in AMPL. Ultimately, utility is what increases value during cycles of volume scarcity. Time will only tell how this utility will impact our own rebase activity, so I’m excited to see if it makes a difference or not.

I think eventually, AMPL will find its utility as it gets implemented in more DeFi and CeFi projects, and when that happens, I think we’ll see much more balanced impact from both the positive and negative mechanics. So this is not me critiquing the value of AMPL as a pioneer in the elastic token community, and I’m bullish on it mid-to-long term. I want to be clear that my criticisms are intended to be illuminating and constructive, and I apologize if they are not.

Personally, as a community, I think we’re fortunate to have been given this opportunity to see how AMPL’s experimental market mechanics actually performed when put through their paces, and now we have the opportunity to correct errors or flawed assumptions AMPL made before we make them ourselves. To that end, I think it would be well worth our time to pursue further utility for YAM on top of governance to help balance our own elastic tokenomics.

TLDR: I agree with @Chitty’s analysis and add that AMPL also has no real incentive to buy during prolonged negative rebasing cycles, creating an inherent imbalance between the positive and negative rebase mechanics, evaluated in terms of actual weighted impact on market behavior. This runs counter to the stated intention of the code. YAM’s governance feature could help correct this imbalance, but the community should continue to analyze these mechanics moving forward to make sure they are functioning as they should for overall health and longevity.

8/27/2020 - Edited for typos and clarity.

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Thank you for taking the time to write such an elaborated response. I completely agree with your quote above, if we see that the elastic system is no working properly we can shift to a different mechanism trough voting. Although to analyze the system in depth we would probably need a decent time frame, probably 6 months to a year, which in crypto is an eternity! lol.

Is it possible to set the base of yamv3 at US $10, with a maximum of 10% for positive adjustment and 5% for negative adjustment each time, so as to reduce the explosive increase and decrease of total currency.

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I think playing with the adjustment offset of the rebase is a great way that we could use to finetune the mechanism.

Out of curiosity, why $10? And do you mean setting the target to $10? Or pegging YAM V3 to $10?

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Everything is possible trough governance

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