About Scalability

Supply Elasticity by Mint & Redeem Arbitrage

SPOT 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.

  • When SPOT is trading above the price of AMPL: There is an incentive to mint SPOT, increasing supply until prices are back in line.

  • When SPOT is trading below the price of AMPL: There is an incentive to redeem SPOT, decreasing supply until prices are back in line.

SPOT does not require continuous demand for leverage to hold a fixed circulating supply

Liquidation-market based systems rely on continuous demand for margin-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.

In the SPOT system, arbitrageurs don't have the burden of managing an open CDP and paying an ongoing fee while worrying about getting liquidated. We've mentioned previously that:

  • SPOT is a claim on lower volatility derivatives of AMPL

  • stAMPL is a claim on higher volatility derivatives of AMPL

  • Holding SPOT and stAMPL together (in the right ratio) is equivalent to holding AMPL

For this reason, the floor of SPOT's circulating supply is determined by the base-rate demand for holding AMPL rather than demand for amplified volatility. Above this floor of base rate demand, the circulating supply of SPOT can increase or decrease based on relative demand for stability (SPOT) or amplified volatility (stAMPL) respectively. In other words for SPOT:

spot_supply=DAMPL+f(Dstability, Dvolatility)spot\_supply = D_{AMPL} + f(D_{stability}, \ D_{volatility})

whereas in the case of DAI:

dai_supply=g(Dvolatility)dai\_supply = g(D_{volatility})

Moreover, in the case of SPOT demand for stability propagates into demand for AMPL through minting / redeeming arbitrage. In other words:

DAMPL=h(Dstability)D_{AMPL} = h(D_{stability})

While in the case of DAI, demand for stability does not propagate into supply of the token at all.

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