– August 30, 2020

If you follow the cryptocurrency universe, you’ve probably seen the big explosion in interest in Ampleforth and the Yam Protocol. Both cryptocurrency projects advertise themselves as a new sort of monetary technology. 

They aren’t. They’re a new type of betting game. I’ve got no problem with these games, but people should see them for what they are.

To understand how Ampleforth works, let’s compare it to bitcoin. Since the quantity of bitcoin is fixed, the price of bitcoin rises when more people want to purchase bitcoins. Not so with the AMPL tokens issued by Ampleforth. As more people purchase AMPL, the quantity of AMPLs rises to keep the price fixed at $1. Since the newly-created AMPL are distributed in proportion to existing AMPL holdings, the net result is the same. When buying pressure emerges, the total value (i.e., price times quantity) held in one’s AMPL or bitcoin wallet increases.

Vice versa when selling dominates. With bitcoin, a selloff causes the price to fall. With AMPL, a selloff causes its quantity to fall. Since each person holding AMPLs loses a quantity proportionate to their holdings, the end result is the same: the total value (i.e., price times quantity) held in one’s AMPL or bitcoin wallet decreases.

Ampleforth has proven to be quite popular. The total value of all AMPLs in existence hit $1.6 billion last month, but it has since fallen to $300 million.

The Yam Protocol is a bit different than Ampleforth, but the pricing mechanism adopted for YAM tokens is pretty much the same as an AMPL token. As buying pressure rises, the quantity of YAMs in existence increases; and, in the event of a selloff, its quantity falls.

The value of YAMs in circulation hit almost $325 million on August 12, just a day after being launched. But the Yam Protocol suffered from a major bug on August 13. It continues to limp on, but the market capitalization of YAM has plunged to a fraction of its pre-bug level.

So what does one do with AMPL and YAM tokens? Much like bitcoin, they don’t provide their owner with any interest or cash flow. Nor can they be consumed.

Yam describes itself as a “minimally viable monetary experiment.”

On its website, Ampleforth gives more detail. It markets itself as an “adaptive base-money.” The first few pages of its white paper are replete with references to monetary economics. We learn that there are several categories of money, one of which is synthetic commodity money. Ampleforth has aspirations to fill this role. It ultimately sees itself not only as a “better bitcoin,” but as a “fair and politically-independent commodity-money” that can be used as an “alternative to central bank money.”

Those are big shoes to fill.

I’m skeptical. The purchasing power of the banknotes in one’s wallet (or deposits in one’s account) tend to be quite stable over time. That’s why people like to hold them as media of exchange. We stock up on a few $20 bills ahead of time in order to buy the next day’s groceries, or to pay a friend next week, or to purchase a car next month. Volatile assets like Apple shares or bitcoins can crater at any moment, and so it’s rare that people use them as money.

That’s why it’s hard to see why AMPL or YAM could ever replace a dollar. While the price of these tokens is relatively benign, their quantity fluctuates wildly. So the total purchasing power of AMPLs (or YAMs) held in one’s wallet is quite volatile despite the purchasing power of a given AMPL (or YAM) being stable. Put plainly, these aren’t dollar substitutes. 

I’d argue that the main use case for AMPLs and YAMs is as tokens in a financial betting game. Think of them as an access point to a self-referential guessing game—that is, a Keynesian beauty contest. 

Presented with a row of faces, a competitor in a Keynesian beauty contest has to choose the most attractive face as estimated by all other participants in the contest. Players don’t try to say which face they think is the most attractive. That’s irrelevant. Rather, they attempt to guess which face they think others think is the most attractive. As John Maynard Keynes described it, these are games in which we “devote our intelligences to anticipating what average opinion expects the average opinion to be.”

In the game of Ampleforth, Jim’s decision to buy an AMPL is a function of what he thinks Bob (another potential buyer) thinks that Alice (another buyer) thinks that Jim will do. If Jim wins this complicated guessing game, he is rewarded with more AMPLs.

These are fun games to play. They are intellectually challenging. But they aren’t monetary phenomena. Crypto beauty contests fall in the same family as poker, sports betting, lotteries and blackjack — not banknotes and bank deposits.  

Ample and Yam aren’t the first crypto-based products to misappropriate terminology from monetary economics. Crypto-based betting has been misadvertising itself ever since Satoshi Nakamoto first swiped the word “coin” for Bitcoin. But Bitcoin is fundamentally a game, not a coin.

The hijack continued when the word “currency” was appropriated to create “cryptocurrency.” Take Dogecoin, for example, one of the more popular cryptocurrencies. Dogecoin’s website markets it as “the internet currency.” But no one actually uses Dogecoin to buy things or make payments. It’s just another decentralized financial guessing game, where if I successfully predict ahead of time when you will buy Dogecoins (while you try to predict when I will buy), then my Dogecoins will rise in value.

Sometimes the advertising is done right, though. Consider the Ampleforth copycat called Based. Rather than advertising itself as a monetary experiment or a currency, Based describes itself as a “post-modern economic game,” a “game of chicken” designed to “shake out weak hands” and yield the highest gains to “those who understand the rules.”

That’s a faithful description of a lot of crypto. Other crypto issuers should be so honest.

J.P. Koning

listpg_koning

J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art. Koning earned his B.A. in Economics from McGill University.

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