Here is a primer on SPOT’s configurations. SPOT was initiated with a conservative configuration, with the intention to observe its performance and incrementally enhance capital efficiency safely.
Currently, SPOT is set up to accept senior tranches (A-Tranches) from approved AMPL bonds at a 20/80 tranche ratio. In simpler terms, users can presently mint 20 SPOT for 100 AMPL.
Tranche ratios balance safety and capital efficiency. With the existing configuration, the AMPL supply must shrink by 80% within the bond’s duration before senior tranches experience any negative impact.
SPOT protocol has been operational for approximately five months, and its price has remained relatively stable. The largest contraction of AMPL supply within a 28-day period (bond length) is around 24%, and historically, AMPL supply has never contracted more than 52% within this timeframe.
Considering these factors, we could revisit the bond issuer’s tranche ratios and update them to 25/75. This change would enable users to mint 25 SPOT for every 100 AMPL (ie, a 25% increase in capital efficiency).
I think well in a perfect world we first wait and see more effects of the market under higher liquidity for $SPOT and stress test another macro blackswan events. The fact is we have a chicken and egg scenario where we want more liquidity but without making incremental changes like this we are holding $SPOT back from reaching adoption and seeing those market events.
Considering the current historical contractions I see no problem with a small 5% ratio increase.
On one hand, it’s a nice thing for the capital to be more efficient and to be able to mint more SPOT.
On the other hand, I’m wondering at what point the chance of SPOT being worth less than 1 AMPL becomes too high?
Considering this fact, I’m leaning towards being in favour of the change to 25/75, but would be very cautious in considering to raise the ratio further than that.
Some technical question I have:
How would this affect the roll over process? Will there just less AMPL be required to roll over the same amount?
Can the ratio be changed back to a smaller ratio again? (Just requiring more AMPL to rollover?)
Can you define SPOT’s “capital efficiency”? Even with a 20/80 ratio it only takes a few rounds of tranching (over a few months) to convert 50% of your raw AMPL value into SPOT.
I don’t see a compelling reason why we need to change the ratio or increase capital efficiency.
Right, given the AMPL supply is stable minting more SPOT with the mature Z-Tranches should allow you to convert most of your AMPL into SPOT. However, as @pascal points out it should smoothen short term mint/redeem arb between SPOT and AMPL, in theory resulting in tighter AMPL and SPOT prices.
I used the term "capital efficiency” loosely. The SPOT system is very different from other protocols like RAI. In other systems it is the ratio between the value of the stablecoin minted vs the collateral used. In the case of tranches, we can recycle the collateral after maturity to mint more.
Though its is not apples to apples, the amount of SPOT minted per AMPL could be still be considered the capital efficiency of our system as that ratio affects the “sustainable” SPOT supply (ie the amount of AMPL required to rollover the entire supply of SPOT).
This should reduce the size of the AMPL stack required to rollover the SPOT supply. Back of the envelope math, we’ll only need 4x the spot supply in AMPL to rollover as supposed to 5x. This is one of the main reasons I view us increasing this ratio over time.
Yes the ratio can be updated back to 20/80 again if we so chose.
If executed on-chain by this Wednesday 5/3/23, this proposal will help accomplish the goals of this initiative to fund Public Goods & Decentralized Science by making the system relatively more capital efficient. Irrespective of time-sensitive on-chain execution, I am in favor of this proposal.
@coldpress asks an important question to clarify how this would make SPOT more capital efficient and the motives to do so.
Complementing thoughts expressed by @aalavandhan1894 regarding capital efficiency, our bicycle/car analogy can help us to see how changing the ratio is similar to switching into higher gear:
Less AMPL ~ Energy ~ is needed to drive the vehicle forward, the output of which is SPOT. Within the current rebase parameters, the SPOT supply should remain sustainable and Senior A-Tranches are unlikely to be affected by contractions.
The bicycle/vehicle is likely to remain in motion, perpetuated by momentum over the 28 day duration.
Thanks for the explanation. I support this discretionary policy to increase capital efficiency.
However, the DAO should be aware that this increases tail end risks of SPOT becoming collateralized by raw AMPL, maybe decreasing the amount of USD that SPOT can be redeemed for, and maybe decreasing the current price of SPOT.
When that happens, will the DAO exact another discretionary policy to reset the tranche ratio from 25/75 to 20/80? How will this impact the stakeholders? Will the policies create moral hazard?
That’s fair. Over the long term, I hope we get to a system configuration we are happy with and we are all happy with and relinquish ownership so that SPOT becomes completely immutable. I’ve personally viewed protocol governance as a crutch in the path toward complete decentralization.
One of the earliest design iterations for SPOT (created around Jan 2022), I envisioned creating it with no governance. I hope we can eventually get there.
You’re right increasing the tranche ratio does increase tail end risks of spot becoming collateralized by raw AMPL (though unlikely given market history), but so does setting a conservative tranche ratio (which I believe is more likely).
Hypothetically, say we set the tranche ratio to 1/100 (which is hyper-conservative). For the current supply of 750k SPOT, we’ll need 75m AMPL to back it. (which is far greater than the total supply and thus will lead to the unavailability of rollover capital, and thus result in spot being backed by raw AMPL). This risk exists on either side of the configuration spectrum (we really can’t magically make it disappear). @Bhau’s bicycle gear analogy is spot on. (The gear cant be too small or too big, there’s a sweet spot in between we need to find.)
The risks are transparent, and it will manifest as spot price volatility (there is no moral hazard here as it’s not obscured in anyway). But larger volatility does mean that spot might lose favor as a safe asset, and as @coldpress’s suggests we need to tread cautiously. We discuss these risks in detail in the faq section in the bend vs break deck, refer Q6-Q13.
There are a few things we should do to de-risk both ends of spectrum.
The AMPL supply curve parameters can be updated through governance. Currently -ve rebases are capped at -7.7%. However, if we look at the average negative rebases over the operating history, it has been far milder. In the last year for example, we’ve only seen a -ve rebase lesser than -3% only once. I will create a separate forum post to discuss this in detail. For example, If we cap -ve rebases at -3.5% that will in theory allow us to increase the tranche ratios to 35/65 with mathematical certainty. (This is one of the reasons I believe, SPOT backed by AMPL will be more robust compared to ETH backed alternatives. We might see this play out at scale.)
We need to increase the size of the rollover capital by converting all idle AMPL holders into active participants to contribute to the sustenance of SPOT. In a month or so, we will be launching a rollover vault (an easy solution to allow idle AMPL capital to be put to work and earn a yield).
Given that 1) can be adjusted through governance, over the long term the size of the rollover capital (relative to spot’s supply) and how long its available (though some sort of on-chain locking) will be the largest uncertainty to SPOT’s price.
After reviewing the proposal, I have some reservations about updating the tranche ratios.
It is essential to maintain a conservative approach to the configuration of SPOT to ensure its long-term sustainability. Given that the protocol has only been operational for less than six months, it may be premature to revisit the tranche ratios. We should allow more time to observe its performance.
Although an increase in capital efficiency may seem appealing, as suggested in the proposal, we must also consider the potential risks and negative impacts on senior tranches holders. Therefore, in my opinion, we should take a cautious approach and maintain the existing tranche ratio to balance safety and capital efficiency.
We should embrace Radical Responsibility for the protocol configuration as much as the team did for protocol design to ensure that the SPOT remains secure and resilient over time.
I’m in favor of this change, as this still looks to be a safe, conservative configuration.
@mauir I appreciate that perspective, so thanks for voicing them as well. I think the term “capital efficiency” doesn’t quite translate to SPOT to same way as it might for other systems. For example, there isn’t a linearly increasing risk function of “capital efficiency”, where as cap eff increases, so does risk. Instead, I view it more as an optimization function with a minimum point that we’d like to live at.
If the ratio is too small (A/Z = 1/99) for a given supply, then it increases risk of stale collateral tranches maturing to the underlying because it can’t effectively use the rollover capital. If it’s too large (A/Z = 80/20), then it increases risk of tranches going underwater. So we want to find the middle ground there. I think a gradual increase of the A size still provides a safe tranche buffer, even when compared to previous extreme AMPL market scenarios we’ve seen.
It’s refreshing to see perspectives voicing caution and Radical Responsibility @mauir. 2022 was fraught with liquidations that largely resulted from impulsivity and lack of accountability; irresponsibility. This is likely to motivate risk aversion, and that is understandable
Fortunately for us, SPOT is distinguished from other Digital Assets because it bends, and does not break
Shifting gears towards a marginally higher ratio of SPOT:AMPL (20:80 —> 25:75) can exemplify this principle and demonstrate the system’s resilience in real time
Towards the optimization function as @Brandon points out, let’s find the Goldilocks zone
I don’t often contribute to these spaces but hopefully you find some value in my response to this proposal.
I appreciate the thorough discussion surrounding the proposal to update the tranche ratios for SPOT’s collateral to 25/75. After reviewing the available information and considering the current market conditions, I would like to express my support for the proposal in principle, but not for immediate implementation.
While the proposed increase in tranche ratio appears to be relatively conservative and would enhance capital efficiency, I believe it would be prudent to postpone the change for the following reasons:
SPOT Maturity: As the SPOT protocol has been operational for less than six months, I think it is essential to observe its performance within the market for a more extended period. This will allow us to better understand the protocol’s resilience and stability under different market conditions and make more informed decisions when updating the tranche ratios.
Macroeconomic Environment: The ongoing banking crisis in the United States and the resulting uncertainties in the broader financial market could introduce additional risks that might affect both AMPL and SPOT. It would be wise to wait until the macroeconomic environment becomes more favorable before implementing changes that could potentially increase the tail-end risks for the protocol.
I believe the proposal to update the tranche ratios to 25/75 represents a positive development for the SPOT protocol. However, considering the current market conditions and the protocol’s relatively short operational history, I would recommend waiting for SPOT protocol to mature further (at least another quarter).
@zacharias I’d like to reiterate the following. SPOT’s stability comes from it being backed by fully collateralized, fresh AMPL safe tranches. Its stability is affected if:
a) Tranches are not fully collateralized.
b) The collateral degrades into raw AMPL.
The tranche ratios affect both A and B. Though going from 20 → 25, mildly increases the risk of a), (ie AMPL could trade at close to 0$ for 28 days which is unrealistic), it heavily de-risks b). For example, When SPOT’s supply reaches 2m, It will require only 8m AMPL to sustain spot as supposed to 10m before the change. 2m AMPL is a meaningful percentage of AMPL’s circulating supply, considering it’s relatively small market cap.
