AMP–O-NOMICS — Key insights on the utility of Amp in Flexa Network
Amp fulfills a key role in Flexa Network as the primary collateral token for securing all transfers and make value move more quickly. If you don’t know what Flexa does and how it works, please read the following article first; Digital Payments 101.
Amp is a utility token
Amp is not exclusive to Flexa; other projects are free to use Amp as collateral for any form of value exchange: digital payments, fiat currency exchange, loan distributions, property sales, and more. However, today, Flexa is the only live project that makes use of Amp.
Open-market availability makes the token sensitive to the general movements of the crypto market. As the activity on the networks grows, the price of Amp is expected to get driven more by its utility, accruing the value of Flexa Network’s spending capacity.
‘Utility’ can be explained by the number of times it is used and in what quantities, but it is more complex; an extensive series of utility-related aspects and processes in play affect the price positively or negatively.
We’re looking at the most relevant factors that drive the value of the Amp token when the network is operational. There is no explicit order, some are solely utility-driven, and others are leaning more on adoption and market sentiment.
The ‘experiment’
With utility becoming the dominant factor that drives the price of Amp, we can expect a more predictable level of Volatility over time — following the pulse of how people pay.
The ‘experiment’; Little Bert filled a big tank with water; he adds a block to the tank for every factor.
Every block makes less place for the liquid, forming a solid foundation on the bottom and pushing the water upwards.
Of course, in reality, every factor (block) is not a static value; visualized as a block, it would grow, shrink or inflate continuously. Affecting the price of Amp.
Transaction Volume
The volume that flows through the network per hour, day, or year, Amp needs to collateralize this; for every transaction, an amount of Amp is locked against the transaction value until the confirmation is achieved on both sides, then the collateral gets released.
8b/ Some interesting figures to get a sense of what we’re talking about; Walmart alone does ~1,4bn in daily transactions, Visa ~11bn, Paypal ~7,4bn Uber ~21mio, and Doordash ~8mio.
Transaction Value
The use cases for digital payments are endless; sandwiches, fuel, concert tickets, dinners, groceries, clothing, yet the majority of our daily spending are < $100.
What if you’re able to pay for your subscriptions, monthly rent for your house or store/office, airline tickets, car, or even a one-time life purchase like a house? The more digital currencies become part of our life, the more we will spend them.
Total Staked Volume
This is a clear metric, showing how much Amp is staked in the network; the more staked, the less Amp available on the open market, driving scarcity.
Settlement Speed
Amp collateral secures the value of a transaction while it remains unconfirmed. Amp tokens are released when consensus for a particular transfer is reached between payer and payee — generally, in retail, this in seconds or minutes.
We’ve only seen a tiny tip of the iceberg to date. For example, what happens when Amp gets used to secure future or delayed transactions? Such as Buy Now Pay Later or short-term loans? It will lock Amp for days, weeks, or even months.
It is not likely Flexa will build and operate these services, but other projects contributing to the ecosystem could use Amp for ancillary services. We might see more of this soon from other developers.
Market Buybacks
One of the essential network mechanisms is the rewards given to stakers. Collected merchant transaction fees are redistributed to everybody providing collateral to the wallets. So naturally, the more transactions, the more rewards are needed.
For every transaction, Flexa has to buy rewards from the open market; this results in a constant buying pressure caused by itself. Buying pressure can be explained as increasingly higher demand for Amp, exceeding the supply of Amp, forcing the price to rise.
Number of Collateral Pools
This number is 1:1 tied to the number of Wallets, each connected to Flexa is required to have its own Collateral Pool. As the number of Wallets grows, there will be more options for holders to stake their tokens: the more Pools, the more scarcity.
Today, holders can only provide liquidity (stake) to SPEDN or Gemini; soon, Flexa Capacity will show much more options (Wallets) to choose from.
Collateralization Factor Transaction
Each transaction should have at least 100% of its value backed by Amp, but more likely, this percentage is required to be significantly higher to cover any form of collateral price volatility.
The volatility of Amp is a risk factor in theory; for example, when the value depreciates 4% at the exact moment of a transaction, combined with a failing transaction (liquidation event), there will not be enough collateral to cover the loss entirely.
Therefore, Flexa will lock a higher amount of Amp against the value of the transaction. It could be, for example, a factor of 150%, meaning a $100 transaction is backed by $150 in Amp. This way, the described edge-case will never occur.
Collateralization Factor Pools
Collateral Pools won’t be capped or closed. Every Amp holder is free to provide liquidity — but there will be a minimum requirement because collateral should always cover the transaction volume, as explained in the previous points.
If there is way more liquidity staked relative to the transaction volume in a pool, it would negatively affect the yield generated, simply because the rewards are shared with everybody providing collateral to the pool.
A similar effect will occur when the price of Amp raises, but the transaction volume stays the same. It will motivate stakers to place their Amp in pools with better yield, e.g., new wallets, less-known or fast-growing wallets in need of more collateral.
Network Collateralization Factor
Due to the minimum collateral requirements for transactions and pools, the overall network collateral requirement is assumed to be (very) conservative to prevent under collateralization by any means.
Imagine the network being undercollateralized due to a combination of factors; for example, a massive Amp price drop, combined with a significant transaction volume peak, that would, in theory, result in many failed transactions.
Amp stakers would therefore be likely to maintain a margin of safety overall for the network, based on the total anticipated collateral needed. The market will determine the factor, but it could be 2x or even 3x.
Timezones
Transactions are never equally spread over the day; there are peak and down hours. However, by becoming active on multiple continents and thus timezones, there will be a more constant transaction volume.
Global adoption will mean a continuous need for collateral during a 24h cycle. When x shops, y sleeps; when x eats, z shops.
Spend (Average Spend vs. Max Spend)
The network always needs sufficient collateral to work; this requires predictions for how much spending will occur on average as a median.
Yet, in practice, the network can’t operate on averages; collateral needs to be readily available for peak moments. Imagine high volume events such as the holiday season, Singles Day, Black Friday.
By any means, Flexa should be able to collateralize these peaks with Amp, which requires a collateral pool that holds at least 2–3x the median.
Liquidation Events
One of the core purposes of Amp is to decentralize risk; this means a large group of people provide liquidity and collectively harvest the upside in the form of rewards, but also take the bill for unfortunate downside events.
There will be failed transactions; there is no such thing as 100% security, and the network has yet to be battle-tested. Due to blockchain’s fraud and risk-averse character and implemented safety margins, the upside will always outpace possible losses.
General Market dynamics/sentiment
The Amp reward mechanism will eventually bring continuous buying pressure to exchanges. The more trading volume at any level, the stronger the support and resistance levels will become.
Non-inflationary
There is a fixed supply of Amp (100bn). At this moment, ~43% of the tokens are released; until 2045, the rest will be released gradually. No new Amp tokens will ever be created.
Scarcity Amp
Looking at all these safety mechanisms and requirements learns Flexa will have a lot more Amp required to be staked in the network than ever needed at any given moment. It contributes to a secure, robust, and stable way of collateralizing transactions.
The effect of so much Amp taken out of the market by the network itself will cause scarcity of the token. We all understand what scarcity does with the price of an asset.
More applications of Amp
The application of Amp as collateral in multiple networks will open up a new, paradigm. New projects will inherit all of Amp its earlier created value, reputation, community, and qualities.
If these new projects successfully adopt Amp, existing implementations such as Flexa benefit from increased liquidity (price ^), reduced Volatility, and overall an enhanced collateral quality.
A Network of highly active Networks with Amp as the collective lifeblood will set a whole new level of value-driving mechanisms in motion.
This article was originally posted as a thread on Twitter.
