About Stability & Durability
For an overview of the system's benefits and tradeoffs please see the About SPOT entry. In this section we'll discuss what we mean by "bending vs breaking" and cover the system's most extreme scenarios.
Recall that the SPOT protocol was built with the understanding that:
Volatility cannot be magically destroyed, it can only be reorganized
No asset can preserve perfectly stable purchasing power forever
Decentralized systems cannot assume that bailouts are forthcoming
For this reason, SPOT was designed to:
Account for all volatility transparently
Preserve long periods of low volatility
Bend rather than break when faced with extreme market conditions
Resume stable value storage after disruptions without reliance on interventional bailouts.
SPOT & stAMPL exist within bounded volatility ranges
In the typical state, where all the tranches in SPOT’s collateral set are fresh, the token is stable. But in the most extreme scenario, where all the tranches in SPOT’s collateral set have matured, SPOT is precisely as volatile as AMPL.
SPOT’s minimum volatility is that of the 2019 CPI-adjusted dollar (left) when 100% of the tranches in its collateral set are fresh. And SPOT's maximum volatiliy is equivalent to AMPL’s (right) when 0% of the tranches in its collateral set are fresh.
Similarly, when all the tranches in stAMPL’s collateral set are fresh, the stAMPL token is ~1.5x as volatile as AMPL. And when all the tranches in stAMPL’s collateral are mature, stAMPL is precisely as volatile as AMPL.
stAMPL’s volatility has a min equivalent to AMPL’s (left) when 0% of the tranches in its collateral set are fresh. And a max volatility of about ~1.5 x AMPL’s (right) when 100% of the tranches in its collateral set are fresh.
The system can go from being collateralized entirely by fresh tranches, to all mature tranches, and vice-versa. Just as tranched AMPL can mature into raw AMPL when rotation balances are insufficient, raw AMPL can be rotated out for tranched AMPL whenever rotation balances become sufficient.
There Are No Catastrophic Breaking Conditions
There are no pegs. And for every quantum of stability in the SPOT system there is a transparent amount of volatility that affords it. Nothing is obfuscated, hand-waived, or ignored. All risk in the system can be seen and priced. Under extreme market conditions SPOT simply gets temporarily more volatile. For expanded commentary on this see: The SPOT Flatcoin — A Low Volatility Derivative or read on below.
The Marginal Utility of SPOT
The marginal utility of SPOT will be determined by its distribution of time spent: near the volatility levels of the CPI-adjusted dollar vs near the volatility levels of AMPL. In the likely scenario where most of SPOT’s time is spent near the CPI-dollar multiple, it is sufficiently low in volatility to be used as a peer-to-peer digital cash and refuge from inflation.
In the unlikely scenario that almost no time is spent near the CPI-dollar multiple, it’s a commodity-money with no non-monetary utility, much as Bitcoin is. And can be used as a different sort of refuge from inflation (ie: the way equities and other investment assets can be thought of as a refuge from inflation).
And you can imagine any number of time distribution scenarios in between the two described above. For commentary on how we expect SPOT to perform over long time horizons see: SPOT v2 — The cost of stability
What does it mean to break?
The breaking conditions SPOT avoids include: any condition that directly damages the broader ecosystem, leads to insolvency, or forces the system to forever cease function
This includes:
Cascading liquidations — Liquidation markets are widely used in the traditional world, but they carry a significant risk of default. At the time of default traditional markets rely on bailouts and bankruptcy proceedings to restore customer assets. More concerningly, liquidations can have a rapid cascading effect that can severely damage broader markets long before bailouts and bankruptcy proceedings complete. The belief that liquidation markets are a good practice for securing value at the base-asset level in decentralized systems, ignores the fact that decentralized systems cannot assume bailouts are forthcoming. In the event that liquidations are halted to avoid catastrophe and global settlement is executed, such systems cease function. Instead of liquidation markets, SPOT uses zero-liquidation tranches that settle all future debts ahead of time and do require active selling to honor contracts. For more information see the blog post on liquidations.
Bank runs — Bank run scenarios present when there is a clear opportunity for faster acting users to withdraw better assets than slower acting users. For example, if a stablecoin protocol has limited collateral on hand and those who redeem first receive the best assets in the system, while those who act last face insolvency, a race to redeem can take place. Rather than introducing conditions that can spur a race to insolvency, SPOT employs free floating price and proportional redemption. Thus at any time, regardless of market conditions, users of SPOT can always hold, sell, or redeem spot without triggering a race to zero.
Insolvency — Insolvency occurs when liabilities are in excess of assets and withdrawals can no longer be fulfilled. In the traditional world this typically gets resolved by bankruptcy proceedings. Some decentralized networks have a global settlement feature that mirrors a simple bankruptcy proceeding, but after executing this will forever cease to function. In the case of SPOT the token is simply a proportional claim on a basket of assets and its price is free floating. As a result insolvency and bankruptcy do not apply.
What does it mean to bend?
To prefer bending over breaking, is to prefer temporary volatility over any condition that directly damages the broader ecosystem, leads to insolvency, or forces the system to forever cease function.
The SPOT protocol trades near-term stability in favor of long-term stability by giving the system a maximum (infinite) window of opportunity to recover from extreme market conditions.
Recall that SPOT is simply a perpetual senior AMPL tranche. It has a single mode of operation (proportional redemption) and no peg. Thus, for every market scenario, there exists an equilibrium price for SPOT that represents the value of collateral it is redeemable for at any given moment.
In the section below, we'll cover the most extreme scenario to illustrate what we mean by "bending rather than breaking." For a more complete understanding how the system behaves in other extreme scenarios, see the degradation scenarios section.
Rotations Halting
In the most extreme scenario the assets in SPOT's collateral set mature in raw AMPL and the SPOT token becomes a freely redeemable claim on the raw underlying asset. Although the system becomes more volatile, there are no bank-run conditions, insolvency, or cascading liquidations that take place along the way.
Recall that timely rotations ensure that the SPOT collateral set is full of fresh senior AMPL tranches which are heavily insulated from volatility. But what happens when rotation demand is insufficient?
The senior AMPL tranches naturally and progressively degrade into their underlying asset (AMPL).
You can think of this as similar to ice and water. Imagine you have a voucher that is redeemable for a percentage of ice in a freezer. Continuing with this metaphor, If the refrigeration process halts (ie: rotations halt) your voucher (the SPOT token) becomes redeemable for a combination of ice and water until the refrigeration process resumes, after which the water progressively freezes back into (and is redeemable for) ice.
Since each vintage of senior AMPL tranches in the SPOT collateral set is offset by a fixed time-window, when rotations halt, the SPOT token becomes redeemable for a combination of raw AMPL and senior tranches. The longer rotations halt for the greater the fraction of redeemable collateral is raw AMPL until rotations resume.
As more senior AMPL tranches mature into raw AMPL the price of SPOT will become temporarily more volatile because AMPL is more volatile than senior AMPL tranches. Similarly, as rotations resume the price of SPOT will become more stable again because senior AMPL tranches are heavily insulated from underlying AMPL volatility.
This process of degrading and resuming is continuous rather than discrete. The system “bends” safely rather than “breaking” catastrophically. More specifically, rather than triggering bank-runs, insolvency or cascading liquidations, while under extreme stress the SPOT token simply becomes temporarily more volatile, and can resume stability in the future without bailouts.
Can SPOT experience a (Terra / Luna) like Scenario?
SPOT is significantly different from the stablecoin designs we’ve seen in the past, but this is a common question and it's worth addressing. By our estimate this question is best re-interpreted as:
“Is there any sort of feedback loop in the design that destroys value for passive holders or the broader ecosystem when the system is faced with extreme pressure?”
Ultimately the answer is no. SPOT does not have any feedback loops of this kind. The system has no peg and only one mode of operation: proportional redemption. Equally importantly, the supply of SPOT scales up and down with demand.
The closest extreme scenario to that invoked by the memory of the Terra/Luna catastrophe, would be if AMPL experiences extreme downward pressure and prolonged contraction so we’ll discuss that here. Recall that the floor of SPOT’s circulating supply is determined by the base-rate demand for holding AMPL. If there’s a significant structural decrease in the base-rate demand for holding AMPL, there exists a case where the balance of AMPL in the rotation vault is insufficient for completely rolling over the senior tranches in SPOT’s collateral set. In this state SPOT becomes more volatile as senior AMPL tranches in the collateral set mature into raw AMPL. However in this state there is also a natural incentive for users to sell and redeem SPOT. Moreover, as the supply of SPOT decreases by redemptions the relative balance of AMPL in the rotation vault becomes increasingly fit to roll over SPOT’s collateral. Each redemption takes significant pressure off the balance of AMPL required in the rotation vault, particularly because tranche ratios are not 50:50 (ie: given an 20:80 tranche ratio, each 1 SPOT redemption frees up 5 AMPL in the rotation vault). While AMPL is finding a new market equilibrium this incentive to redeem SPOT and reduce its supply continues. Eventually the AMPL market cap will find a new floor—that is to say a new base rate demand for holding AMPL will be established—and there will be an implied equilibrium supply of SPOT such that the balance of AMPL in the rollover vault is sufficient to rotate all assets in SPOT’s collateral set. Once enough SPOT has been removed from supply, the entire collateral set can be rolled over again and the system fully restabilizes.
To put this into perspective, see this table comparing the actions SPOT, DAI, and UST can take in this sort of extreme scenario where the collateral asset is experiencing extreme downward pressure.
Table Comparing Stablecoin Protocol Options Under Extreme Pressure
SPOT (Options Under Extreme Pressure)
Redeem SPOT: decreases pressure on AMPL vault balance Redeem SPOT + deposit in vault: decreases pressure on AMPL vault balance and increases AMPL vault balance
Sell SPOT: leads to redemptions by arbitrage which decreases pressure on AMPL vault balance
DAI (Options Under Extreme Pressure) Halt Liquidations: Prevents cascading liquidations but traps assets in the system Halt Liquidations + Execute Global Settlement: Prevents cascading liquidations and returns remaining assets to users (similar to a bankruptcy) after which the system is over. Mint MKR: In the event where people don’t want to hold MKR, this could be like minting LUNA to bailout UST Ask for Bailout: There’s always a chance someone can bail out the system, but we think this defeats the purpose of sovereign independent money. We have fiat money that’s already good at bailing itself out.
UST (Options Under Extreme Pressure) Mint Luna: Didn’t work, not sure why they believed so strongly that it would Ask for Bailout: There’s always a chance someone can bail out the system, but we think this defeats the purpose of sovereign independent money. We have fiat money that’s already good at bailing itself out.
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