About Debasement

We touched on the rollover incentives previously in About System Incentives and in this section we’ll discuss how these incentives impact the value of the SPOT token over time.

Emission Rewards Debasement

Rollover rewards are paid for out of the fee buffer and by emission rewards. Only emission rewards contribute to SPOT debasement and the maximum rate of SPOT debasement by emission is deter- mined by two configuration parameters:
  • Rollover Reward
  • Bond Length
Let’s say bonds mature n times per year and we want to cap the rate of SPOT debasement by emission rewards to k% annually. To accomplish this, we would configure rollover reward r, using the following equation:
k=(1+r)nr=k(1/n)1k = (1+r)^n \\ r = k^{(1/n)}-1
The rollover reward and bond length parameters can be configured by governance.
Alternatively an auction contract can be used to allow market participants to bid on rollover re- wards. Instead of a fixed rate of debasement, the auction model minimizes debasement by allowing rewards to be determined by the market. This eliminates all guess-work from determining what incentive is necessary for securing perennially fresh collateral and minimizes governance.

Undercollateralized Rollover Debasement

The second way SPOT can experience debasement is by the rolling over of undercollateralized tranches for more details on the process of rolling over see About Minting, Redeeming, and Rolling Over.
When a stale tranche is undercollateralized, users rolling over withdraw more senior tranches than they deposit, diluting each SPOT holder’s claim on the collateral set.
The system can minimize (and in most cases entirely avoid) this type of debasement by configuring tranche ratios and bond lengths such that the likelihood of tranches becoming undercollateralized by the time of maturity is negligible. Consider the following example:
Let’s imagine the active bond issuer is configured with (.20, .80) (senior, junior) tranche ratios. This means AMPL supply would have to contract by > 80% before senior tranches are impacted. At present, the maximum rate of AMPL contraction is 7.77% per day if the price per AMPL is $0. Thus, an entirely debasement-proof bond duration can be computed as follows:
0.2=(1.10)bond_lengthlog(0.2)=bond_lengthlog(0.923)bond_length=log(0.2)/log(0.923)0.2 = (1 - .10)^{bond\_length}\\ log(0.2) = bond\_length*log(0.923) \\ bond\_length = log(0.2)/log(0.923)
In practice the likelihood of AMPL price falling to $0 is infinitesimal, the above just illustrates an extremely conservative configuration. For more details on live configurations see About SPOT Configurations.

Discussion of Inflation Resistance

We refer to SPOT as a refuge from inflation throughout the paper and in this section we’ll expand on it briefly. For an overview of how the system works see About SPOT.
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 Friedmann’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.
Lastly, any SPOT user can choose to insulate themselves from debasement altogether by participating in rollovers. This stands in contrast to the Cantillon effect faced by fiat monetary expansion, whereby participants who are “close to the money” i.e. big companies, banks, etc. have greater insulation from price-inflation than those who are not.
In the next section we'll cover Spot Configurations.