When we first started the Chainlink Hackathon we had two goals in mind:
- We wanted to create a derivative of Ampl that out-performed existing Ampl-derivatives when the market was trading sideways
- We wanted to use Mooncake’s risk stratification approach to allow Ampl holders to borrow more (i.e greater capital efficiency)
Our hackathon submission was pretty close to doing this, but we’ve made some tweaks and we’ll explain from ground up how A-PRIME and Z-PRIME allow us to do this.
Increasing Capital Efficiency (i.e. Borrowing more):
MoonCake works by slicing the rebasing asset into different “seniority levels”, which is essentially just a dibs list of who gets to claim what first. People are able to borrow against their AMPL by selling these safer tranches for stable-coins that they can use for things that have higher growth potential.
The question we asked was what would happen if you packaged a portion of the safe tranche and the volatile tranche and sold it as one? This is roughly equivalent to how a SIP (Structured Investment Product) works. These grew in popularity in TradFi because they facilitated a way for corporations to issue cheap debt (i.e. borrow with low interest). 👀
If we take that strategy and apply it to ButtonTranches, we can call this A + Z product an A-Prime. And just like an SIP it has more upside than just the A by itself, and therefore let borrowers borrow more.
Figuring out how to distribute:
The subsequent question we need to ask is how much of the Z-tranche do you give to the new SIP? For our Hackathon project, we let this be arbitrary. But after some consultation, we came to the realization that this doesn’t provide significant value to the end holder of an A-PRIME investment. We want to thank Michael and Nathan from Krypton for helping us not only realize this, but also for helping confirm that our updated design described below is far more useful.
We returned to our initial goal of creating a derivative that out-performed the market when Ampl Supply was moving sideways.
Instead of providing an arbitrary amount, let’s define the amount of payoff transferred to the A-PRIME as a variable that is now dependent on the supply change of the underlying. With the function below, the A-PRIME asset has the largest payoff when the supply is unchanged (100% of the Z-tranche deposit). In contrast, what this means for the Z-PRIME is that this is reflective of a position that is short small supply deltas. This provides a way for borrowers to borrow more against their capital if they believe that there will be a large supply delta in the time ahead.
Meanwhile, if you believe that the supply will not change much, then you can go long small supply delta by holding A-PRIME — which has a ton more upside (compared to A-tranche) when supply is moving sideways.
Since derivatives are merely a function of the underlying, we’re able to go thru Ampl’s historical supply data to see how each of these assets would have performed. Unsurprisingly, A-PRIME is the asset that outperforms the market when Ampl is trading sideways as was the case between 12/20 and 3/21. Z-PRIME outperforms the other assets when there is a large supply change.
Going back to our strategy, we can also define our payoff function however we like. What if we did the opposite — where the payoff saturates at a certain level of supply change? This would be a unique asset on it’s own in that the borrower position would be short large supply delta. Something like this would be especially useful as derivatives for btnBTC and btnETH, which have more/less been range-bound over the last year.
This will give users more flexibility in position management. Let’s say you believe that supply will not change over the coming month. What you can do is take a short-large-supply-delta position, which will let you borrow USDT that you can deposit on Aave for interest until the end of the loan period.
Let’s say you don’t think supply will change over the coming month, but you’re not as certain, or don’t have any capital to borrow against. Then you can take a long-small-supply-delta which will retain most of its value in A-tranche, but also provide a handsome payout if the supply does indeed remain stable.
We’re super excited to launch our Alpha on test-net which we believe is a huge upgrade over the pre-Alpha we released after the Chainlink Hackathon. At the same time, we’re looking for as much feedback as possible so that we can make the experience as intuitive as possible for our end-users. Please reach out if you have any feedback as we gear up towards our Beta launch on Mainnet.
We also have some exciting roadmap ideas about how we can apply the strategy discussed in this article to other use-cases for DeFi, DAOs, and some of the stuff PRL has coming up… more on that soon™.