Algorithmic Monetary System
What is the AMS?
AMS, or Algorithmic Monetary System, can be understood as a monetary policy tool, an algorithmically automated currency control system. It refers to a system where currency issuance and burning are controlled by smart contracts without human intervention, aiming to regulate inflation.
Concept
The "Algorithmic Monetary System" functions through a mechanism where currency minting and burning are intricately linked to market supply and demand dynamics. This fundamentally differs from the traditional model where a nation's currency is managed by a central bank and regulated through monetary policies. Instead, it can be appropriately characterized as a decentralized and automated monetary policy tool. In this innovative approach, smart contracts, rather than central banks, respond to real-time market dynamics to perform minting and burning processes based on demand and supply, thereby maintaining the appropriate circulation of currency in the market.
This concept differs from Algorithmic Stablecoins, which focus on pegging the value of the coin to a specific level. AMS, on the other hand, is more accurately viewed as applying the concept of Bitcoin's halving algorithmically in a manner where the supply decreases with buying pressure. Unlike other concepts designed to track the value of something else, AMS places more emphasis on maintaining scarcity rather than representing value. While scarcity may be reflected in a particular value, AMS focuses solely on maintaining the scarcity of currency in circulation based purely on market demand logic. Therefore, AMS is designed to manage inflation of newly minted currency. Thus, while it may encompass stablecoin concepts, it needs to be understood from a different perspective.
Although AMS allows for the control of currency issuance volume and scarcity, the value of the currency, which represents its individual value, is evaluated externally based on market demand. So it is necessary to understand the two differently. For example, if the circulating supply of a certain currency is 100, the value of one may increase depending on demand, but if the demand for the currency decreases, the value itself may decrease. In this case, regardless of the amount of currency issued, the evaluation of the currency made externally according to market logic has been lowered, and it can be said that the amount of issuance and scarcity are not directly correlated with the value of the currency.
Similarly, there exists the concept of Automated Monetary Policy. However, AMS is designed to adapt algorithmically to dynamic market conditions, operating at a more granular level of programming without human intervention, hence referred to as a system rather than a policy.
Mint and Burn
To implement AMS, a similar approach to the traditional currency model is applied. Typically, there is a minting cost, akin to the issuance of currency by central banks, which requires collateral similar to the gold-backed currency system. This collateral can be interpreted as collateralized debt issuance or the cost required for issuance, encompassing all aspects due to the nature of cryptocurrencies. As issuance occurs at a fixed minting cost, the quantity issued for the same cost decreases over time. This iterative process reduces the issuance of new currency, consequently decreasing inflation and maintaining the currency's circulation at a steady level.
In the traditional gold-backed system, currency issuance was directly tied to the quantity of gold held in reserve by banks. Similarly, with AMS, the value of the newly issued currency is backed by some other asset. Unlike the opaque banking systems of centralized structures, where more currency was often issued and circulated than the amount of gold held, leading to inflation, blockchain technology allows for a more transparent and trustworthy environment. By constructing an automated system on the blockchain, AMS aims to maintain scarcity from external sources, thereby preserving the value of the currency. This approach aligns with the principles of Bitcoin as a transparent and finite asset, offering new possibilities for the financial landscape.
Bankruptcy Prevention
This naturally occurs through the repeated process of AMS burning and minting. In the event of significant selling pressure in the market, users would seek to burn or redeem tokens held through smart contracts, accessing deposited assets. As tokens are burned in response to selling pressure, the scarcity of circulating assets increases. While the implementation of this process may vary based on specific characteristics and algorithms, one approach could involve accelerating the increase in token scarcity compared to assets deposited in a particular Vault. As more assets are pledged, scarcity increases, deposit assets decrease, and consequently, the value rises.
What Sets AMS Apart?
vs Legacy DeFi
The predominant model for currency issuance in traditional decentralized finance (DeFi) revolves around interest rewards for staking. However, to guarantee the value of tokens in circulation, new market participants must be incentivized to inject capital. Unfortunately, in pursuit of high APY and APR over short periods, a significant quantity of tokens often floods the market, causing a rapid reduction in token scarcity before adequate market demand is established. Compounding this issue is the lack of mechanisms to retrieve and control the entire circulating supply of minted tokens.
Essentially, traditional DeFi lacked the fundamental concept of monetary policy tools from the outset. Consequently, they lacked the means to control the currency they issued. Addressing this necessitates endowing tokens with utility and fostering demand for token consumption among users. However, the gradual generation of sustained demand remains a collective challenge for the entire cryptocurrency industry, with only a few DeFi projects effectively tackling this issue.
vs Legacy Monetary Policy
In the traditional monetary system, all currencies are exclusively controlled and managed by central banks. Through centralized mechanisms, central banks regulate the circulation of currency in the market either by directly issuing currency or by adjusting benchmark interest rates. These adjustments are typically executed through monetary policies such as quantitative easing or interest rate hikes.
In contrast, the Algorithmic Monetary System automatically adjusts the circulation of currency based on a predetermined algorithm that responds to market supply and demand. Unlike centralized entities that issue currency or adjust benchmark interest rates, this system relies on market logic determined by multiple participants.
A significant distinction lies in the fact that currency retrieval does not occur forcibly through an increase in benchmark interest rates. Instead, currency retrieval occurs naturally as market demand decreases, resulting in an increase in the exchange rate. Consequently, the organic reduction in circulating token supply leads to an increase in token scarcity when retrieved from the market.
These comparisons highlight the innovative approach of AMS, leveraging blockchain technology to implement automated currency control mechanisms, offering a transparent and efficient alternative to traditional monetary systems and decentralized finance platforms.