SPOT is a decentralized flatcoin that uses tranching instead of liquidation markets to provide stability that scales. SPOT can be held directly as a refuge from inflation, used as a peer-to-peer digital cash, or held as alternative collateral to USDC within reserves.
Today's decentralized stablecoins rely on liquidation markets to secure stable value. This makes them vulnerable to cascading liquidations and difficult to scale. The SPOT token is a CPI-tracking stable asset that uses zero-liquidation tranching to provide stability. It is designed to:
- Tracks CPI
- Scales up and down with demand
- The Senior Perpetual (SPOT): Is a low-volatility (stable) derivative of AMPL. It is debt-like instrument that can be used as a durable, inflation-tracking, stable asset across long time-horizons.
- The Junior Perpetual (stAMPL): Is a high-volatility derivative of AMPL. It is an equity-like instrument that is more volatile than AMPL and captures the bulk of network changes. It is a staked AMPL position that facilitates rollovers. Additionally it pays or extracts an unsigned fee to those who stake.
- Tranche Ratio: The magnitude of volatility insulation and amplification created by senior and junior tranches respectively, is determined by a preconfigured tranche ratio.
- Conservation of Volatility: The combined volatility of senior and junior tranches always equals the volatility of AMPL because capital is conserved in the system. For this reason, holding the both SPOT and stAMPL tokens in the right ratio is similar to holding AMPL.
To create senior and junior perpetual tranches, the SPOT protocol first resegments the risk of AMPL into fixed-term tranches. Then it bundles the fixed-term tranches into rotating collateral-sets to make them perpetual. The remaining documentation explains how we derive perpetual tranches from fixed-term tranches and discusses the benefits of our approach in detail. Broadly there are three steps to this:
- 1.Tranching: The process of resegmenting volatility into two fixed-term derivative assets (senior and junior). Senior tranches are low volatility derivatives that can be used as stable stores of value. Junior tranches are higher volatility derivatives that capture the majority of network changes.
- 2.Bundling: The process of bundling fixed-term tranches into a collateral set to make them fungible across vintages.
- 3.Rotation: The process of continually replacing fixed-term tranches nearing maturity with fresh counterparts to create perpetual senior and junior tranches that are perennially liquid.
This simplified system diagram below illustrates how the two systems interact.
Overview of interaction between the SPOT collateral set and the stAMPL rotation vault. At the time of rotation 1) maturing seniors are withdrawn and 2) AMPL in the rotation vault is tranched, the fresh seniors are deposited into SPOT's collateral set and the fresh juniors remain in the rotation vault.
At steady state the SPOT collateral set holds fixed-term senior tranches while the stAMPL rollover vault holds a combination of fixed-term juniors and raw AMPL.
The rollover vault 1) tranches raw AMPL and 2) rotates maturing fixed-term senior tranches out in exchange for fresh fixed-term senior tranches in. This process of continually rotating fixed-term tranches in and out, creates perpetual senior and junior tranches. Timely rotations ensure the SPOT collateral set remains filled with fresh senior AMPL tranches that can be used to store stable value.
You can think SPOT as a lower volatility AMPL and stAMPL as a higher volatility AMPL. The rollover reward balances changes in demand between the two collateral sets.
- Demand for volatility (stAMPL) is high: When the demand for amplified volatility is higher than the demand for stability, the rollover vault extracts a fee from stakers through SPOT deflation at the time of rollover. This has the effect of gradually increasing the redeemable value of SPOT (ie: if 1 SPOT was previously redeemable for 1 senior AMPL tranche before, after 1 SPOT will be redeemable for > 1 senior AMPL tranche).
- Demand for volatility (stAMPL) is low: When the demand for amplified volatility is lower than demand for stability (SPOT), the rollover vault pays a fee to stakers through SPOT inflation at the time of rollover. This has the effect of gradually decreasing the redeemable value of SPOT. (ie: if 1 SPOT was previously redeemable for 1 senior AMPL tranche before, after 1 SPOT will be redeemable for < 1 senior AMPL tranche).
- Equilibrium: At equilibrium the rollover reward is 0. Note: Stakers will still receive an emission of the governance token FORTH for participating in rollovers, but this entirely separate from rollover fees.
The SPOT protocol is a significant departure from current-generation solutions. However its benefits can be easily seen when the following axioms are embraced:
- Axiom 1: Volatility cannot be magically destroyed it can only be reorganized.
- Axiom 2: No asset can preserve perfectly stable purchasing power forever.
- Axiom 3: Decentralized systems cannot assume that bailouts are forthcoming.
Given the above, what we need is a decentralized asset that can:
- 1.Account for all volatility transparently
- 2.Preserve long periods of stability
- 3.Bend rather than break under extreme market conditions
- 4.Resume stable value storage after disruptions without reliance on bailouts.
Both SPOT and stAMPL are floating-price tokens. Neither token is vulnerable to bank-runs or insolvency, and in this sense they are similar to UNI-V2 LP tokens.
- Free floating price: Just as UNI-V2 LP tokens can occupy any price without breaking, so can the SPOT and stAMPL tokens.
- Proportional redemption: Just as UNI-V2 pools can unwind to empty sets without triggering bank-runs, so can the SPOT and stAMPL collateral sets.
For every quantum of stability in the SPOT system there is a transparent quantum of volatility that affords it. This allows all risk in the system to be priced. And for every market condition affecting the value of SPOT's collateral, there exists an equilibrium price for SPOT.
Moreover, SPOT's collateral uses tranching rather than liquidation-markets to secure stable value and is immune to cascading liquidations that risk damaging broader markets.
Unlike liquidation-market-based systems, SPOT does not rely on continuous demand for leverage to maintain a fixed circulating supply. Instead, the supply of SPOT increases and decreases with demand for the token through mint & redeem arbitrage, which doubly serves to promote long-term stability when markets face inevitable secular changes in demand.
Lastly, in the most extreme (albeit unlikely) case where rotations halt, the fixed-term senior tranches in SPOT's collateral set progressively mature into raw AMPL and SPOT becomes more volatile, bending rather than breaking. After bending, the system can later resume stability without reliance on capital injection or bailouts.
At every turn, the SPOT protocol design elects for decentralization, long-term stability, and durability over near-term stability. This is because:
- There already exist fiat currencies like the US dollar which are stable in the near-term.
- Such currencies are widely available within their respective regions but highly permissioned outside their regions.
Thus in our view, the primary opportunity to innovate lies in producing instruments that:
- Can hold stable value in the long-run.
- Can achieve this without a government administrator.
For this reason, the SPOT token will be more volatile than assets like the USD in moments of extreme market turmoil. However, it will be permissionless and capable of storing stable value in the long-run.
This makes SPOT less valuable to those who are unconcerned with inflation and can freely use fiat currencies for all their purposes. And more valuable to those who seek refuge from long-run inflation and to those who require self-sovereign value storage.
From the user’s perspective, the SPOT token is a freely redeemable claim on a basket of on-chain collateral. Let's illustrate this with a simple example:
Example 1: Imagine there are 1000 SPOT tokens in total circulation and Alice holds 10 SPOT tokens. Alice owns 1% of SPOT’s circulating supply and she can redeem her 10 SPOT tokens for 1% of the collateral set through a smart contract at any time.
The price of SPOT is free-floating and left up to the market but will simply reflect the value of what the token is redeemable for in a collateral set. At no point will the price of SPOT affect Alice's ability to redeem.
- If the value of the collateral goes up, the price of SPOT will go up because each SPOT token is redeemable for more value.
- If the value of the collateral goes down, the price of SPOT will go down because each SPOT token is redeemable for less value.
In the event that there are multiple asset types in the collateral set, SPOT tokens redeem proportionally across all asset types:
Example 2: Let’s again imagine there are 1000 SPOT tokens in circulation and Alice holds 10 SPOT tokens. This time, however, let’s imagine the collateral set comprises two classes of assets A and B. When Alice redeems her 1% of SPOT tokens, they are released proportionally. This means Alice receives 1% of the A tokens in the collateral set and 1% of the B tokens in the collateral set.
The benefit of free floating price and proportional redemption is the system has no bank-run conditions and can safely unwind to an empty set.
- Free-floating Price: The price of SPOT can be any value because SPOT is just a one-directional claim on a basket of assets. Just as the price of Uniswap-V2 LP tokens can occupy any number without breaking, so can the price of SPOT.
- Proportional Redemption: Means the composition of collateral remains the same before and after any given redemption, so the value of SPOT remains the same even as users withdraw to an empty set. Just as Uniswap-V2 LP tokens can safely unwind to an empty set without triggering any bank-runs, so can SPOT.
The combination of free-floating price and proportional redemption means at any time, regardless of market conditions, users of SPOT can always hold, sell, or redeem SPOT without triggering a race to zero.
Broadly what makes SPOT stable, scalable, and durable is the manner in which collateral is tranched, bundled, and rotated. In this section we’ll talk about how collateral is tranched.
SPOT uses zero-liquidation tranches to hold stable value. Zero liquidation tranches are transparent, composable, and self-contained. Here we'll introduce a basic overview of AMPL and tranching.
AMPL is the underlying collateral asset used in the SPOT system. AMPL’s key distinction is that its price targets the CPI adjusted dollar and can thus be used as an inflation-tracking unit of account. Think of AMPL as a price-stable but supply-volatile cryptocurrency. Rather than price increasing and decreasing with demand, the quantity of tokens in user wallets increases and decreases with demand.
Price Volatility (Typical) vs Supply Volatility (AMPL)
Above we show the difference between price expansion and supply expansion. On the left, as demand increases the price of a token increases correspondingly. On the right, as demand increases, the quantity of units increases but the price per unit remains constant. In practice, the automatic process of adjusting supply in response to demand takes time to find equilibria, but the long-run result is a price-stable but supply-volatile cryptocurrency. For more information please see the AMPL Documentation.
Tranching is the process of resegmenting the volatility of an underlying asset into two or more assets with different volatility profiles.
Before any collateral is deposited into the SPOT system, the volatility of underlying AMPL is first resegmented into junior and senior tranches with predetermined maturity dates and tranche ratios using an open protocol called ButtonWood Tranche.
Separating AMPL volatility into Senior and Junior Tranches
It is the senior AMPL tranches that are used as collateral in the SPOT system.
Note: Senior tranches can be thought of as a type of liquidation-free debt and Junior tranches can be thought of as a type of liquidation-free equity. This is because capital is conserved in the system and all future debt is determined and settled at the time of initialization.
Although senior tranches are heavily insulated from supply volatility, and can be used to store value, they are not fungible across vintages.
This is because different vintages mature at different times and have thus endured different market conditions. For this reason, senior tranches are bundled into a rotating collateral set. Thus SPOT is a proportional claim on a perpetually rotating set of senior AMPL tranches.
Collateral rotation or "rolling over", is the process of withdrawing tranches that are nearing maturity from the collateral set and depositing fresh tranches into the collateral set.
The SPOT collateral set — rotation
Timely rotations ensure that SPOT is collateralized by fresh senior AMPL tranches. In this state, the SPOT token behaves as a stable asset. The process of rotation is upheld by a system of incentives covered in the About Rollovers section.
Important Note: Rotation halting is not a critical failure point for SPOT. If rotations halt for a prolonged period of time, the assets in the SPOT collateral set mature gracefully into raw AMPL at which point the SPOT token becomes a proportional claim on raw AMPL. Thereafter, the SPOT system can resume stable value storage when rollovers recommence. For more details please see About Degradation Scenarios.
We mentioned above that SPOT is a freely redeemable claim on senior AMPL tranches. Because these senior AMPL tranches are heavily insulated from the underlying asset's supply volatility, a claim on senior AMPL tranches can be thought of as a claim on future AMPL.
Recall that AMPL is a price-stable but supply-volatile cryptocurrency that targets the CPI-adjusted dollar. Rather than price increasing and decreasing with demand, the quantity of tokens in user wallets increases and decreases with demand.
For this reason, you can think of holding X senior AMPL tranches with 28 day maturity, as similar to holding X future AMPL tokens that are insulated from volatility for a period of 28 days.
Since an X SPOT claim is a claim on X future AMPL, and the price of AMPL targets the CPI-adjusted dollars, an X SPOT claim tends to be worth X CPI-adjusted dollars. In shorthand:
X SPOT → X future AMPL
1 AMPL → 1 CPI-adjusted dollar
X SPOT → X CPI-adjusted dollars