Transcript of the Ampleforth office hours on 22.09.2021

Simon:
From Prometheus Research Labs (PRL) we’ve got Socks&Flops, Mark, Fantasea and and Manny. Soo let’s start out by talking about what PRL has been up to. They will give an overview of what they’ve been working on and then I think they wanted to share the testnet link in case any of you wanted to test it out. Manny, let us know what PRL’s been up to!

Manny:
Hello AMPL world! So at PRL we’ve been focused on building out the Buttonwood protocol system. Buttonwood is a family of DeFi protocols that are composable and extensible (This is the core project for the Buttonwood Foundation).

  • Composable because the core contracts can be combined in different ways to build out the missing parts of the DeFi stack — fixed-rate fixed-term debt, options, fiat-free stables, yield-splitters, etc.
  • Extensible because anyone can build to incorporate other assets.
    Now, one special thing about Buttonwood is it uses rebasing as a core technique within its protocols — and rebasing is what allows it to be as modular and extensible as it is.

We think of Buttonwood as financial algebra — in the sense that a core set of functions (in this case ButtonTranche) and wrappers (buttonTokens and unButtonTokens) produce everything else you need to build the DeFi Stack.

I run PRL along with Mark but PRL is just one of various firms and devs composing new instruments on top of Buttonwood — you’ll meet some of them later! So without delay, I will hand it over to Mark who is going to introduce the first such instrument composed with this algebra.

Mark:
Hey guys! We’re super excited to share the testnet beta launch of the borrowing application that we’ve been hinting at over the last few months!!

We have created a fixed rate, fixed term, no liquidation lending application that uses AMPL as collateral! We hope that this product serves as an introduction to the benefits that rebasing tokens have for creating robust, composable financial applications!

In addition, this product is based on an entirely new DeFi primitive — price risk tranching. We think that this primitive can be used to build a wide swath of DeFi products — this is just the tip of the iceberg.

You can find a link to the site here: https://borrow.prl.one/ and a document explaining how to use it here: https://docs.google.com/document/d/1VKMAuro2NZEgiD-hvI3Scy5fmHcaoOObC8qKu0GdcZU/edit?usp=sharing

Happy to answer any questions on this, and discuss what this means for the future of elastic France.

NOTE: this is just a testnet deployment — we wanted to get something into your hands to check it out early. Please provide feedback — we are working on this furiously to get ready for mainnet launch and if there are any improvements or suggestions you have, we would love to take them. The PRL discord is the best place for this: https://discord.gg/jYm3YbXC

Question 1:
Is AMPL as collateral subject to rebase?

Manny:
Yes, AMPL doesn’t ever stop rebasing.

Question 2:
How exactly we can avoid liquidations if AMPL is negative rebasing?

Manny:
How about a picture:

Mark:
The core part of this protocol is the tranching mechanism — which slices your AMPL into 3 different components. This is detailed at the bottom of the google doc posted above.

As a borrower, you will get some USDT, as well as some Z tranches as a result of your loan. This means that if AMPL negatively rebases, your Z tranches feel the impact, but nothing ever gets taken from you. This is the benefit of tranching — it allows you to surgically separate risk and distribute it to the relevant parties.

Follow up question 1:
So if I was extremely bullish on AMPL, I could load up on tranche Z and be ‘leveraged’, so to speak?

Mark:
YES — exactly.

Manny:
That’s exactly what’s great about this. It allows the market to price information and expectations. If you were bullish on AMPL, you’d be borrowing — producing a bunch of Z-tranche for yourself.

Follow up question 2:
Any specific reason the protocol is designed to sell the tranches for USDT? as opposed to USDC or other “stables”?

Mark:
Oh — there is no reason for this. We could use USDC just as easily

Question 3:
Do you get the rebased amount back when collateral rebases or the deposited?

Mark:
The rebased amount! The Z tranches get all of the upside of your collateral, and as the borrower you hold on to these.

Question 4:
So the liquidity providers sell the tranche token at a discount, which is what dictates the interest rate. but the interest rate is fixed right? so does that imply this liquidity pool is always selling at a fixed discount?

Manny:
This would mean that the price of the A + B tranches would decline — i.e. you are paying a higher interest rate for the leverage.

Mark:
The interest rate is fixed for a given borrower in the context of their loan, but from lender’s perspective it is not fixed. As AMPL price changes, the discount might change as well.

Question 5:
How can your collateral rebase like holding AMPL if the AMPL gets sold on Uniswap v3?

Mark:
The AMPL doesn’t get sold on UNI — the AMPL-A and AMPL-B tranches do, which don’t rebase.

Question 6:
What’s a tranche?

Mark:
They are ERC20 tokens in their own right which represent different risk profiles of the collateral.

A simple example:

A user creates a 20/80 A-Z tranche and deposits 100 AMPL and mints 20 A Bond tokens and 80 Z Bond tokens which matures 30 days from now.
At maturity the 20 A bond tokens will be worth at most 20 AMPL and the 80 Z bond tokens will be worth the rest. Functionally thats it.

So 30 days from now:

  • AMPL doubles in supply -> The A bond tokens will be redeemable for 20 AMPL and Z bond tokens for 180 AMPL
  • AMPL halves in supply -> The A bond tokens will be redeemable for 20 AMPL and Z bond tokens for 30 AMPL

The A bond tokens act as an AMPL derivative which doesn’t rebase but just provides price exposure (price always returns to 1 like a stablecoin)
The Z bond tokens act as a leveraged long position on AMPL.

Tranche lets us split risk and create new assets with more desirable risk return tradeoffs and we are just scratching the surface.

Evan:
https://www.investopedia.com/terms/t/tranches.asp

Follow up question:
Do any of the tranches rebase?

Manny:
None of the tranches rebase. Only the collateral does.

Follow up thoughts:
The A tranche can still suffer loss, it just requires a much larger hit to the AMPL total supply to do so.

Question 7:
Where did the name Buttonwood come from? Are you fans of trees?

Mark:
The Buttonwood Agreement! It was the foundation of the NYSE. https://en.wikipedia.org/wiki/Buttonwood_Agreement

Question 8:
It sounds like you guys chose the %’s for the slices based on historic performance of AMPL?

Mark:
Good question — the tranche ratios are set to tune the risk profiles of the different tranches. For example, the A-tranche is very safe with the current model — safe against 80% value drops of AMPL — because of the tranche ratios set at 20/30/50. Riskier assets may need more skewed tranche ratios to keep the A-tranche as safe as possible.

Question 9:
Do you see any risks with breaking up the AMPL into various tranches? Is there a risk when further dividing that could potentially break AMPL?

Manny:
The tranches mature, so they revert into AMPL (financially speaking).

Hmm so as I was saying, think of corporate debt. When a company’s assets are liquidated, senior debt holders get paid first, then junior holders, then equity holders. Equity holders, besides having the highest risk, also get all the upside. Bond holders have capped payouts.

Question 10:
Other than the doc, will there be a website and or marketing for this to help the simple man understand and bring this to the masses?

Manny:
There will. You are no simple man at all if you’re in DeFi today.

Question 11:
Is there a rough estimate for when this will go live?

Manny:
For our lending dapp we’ll try to keep things simple, but link out to the more thorough materials. We believe in full transparency of code and financial architecture. It is why we have spent so much time building these protocols
(since March!)

Everything’s been audited twice, etc. We’re just putting on some finishing touches. You will hear from other teams building on this in a month or so I suspect.

Question 12:
How will the first app be marketed?

Aalavandhan:
The first application is a lending app which lets you borrow stablecoins against your AMPL.

Question 13:
What is the longest we can take out a loan for?

Mark:
We will likely have 3 month and 1 year options at launch.

Question 14:
When are you guys thinking of the tools going mainnet? October?

Mark:
We have a few things to line up, but I would say October is a good target.

Question 15:
So would unbuttonedAMPL be a stablecoin essentially?

Aalavandhan:
No unbuttonedAMPL is wAMPL .. The Tranche AMPL A-Bonds will behave stableish. They will eventually be a collateral for a stablecoin.

Question 16:
I’d like to know the story about how the PRL team and the AMPL team met.

Manny:
So there’s this little group called the Illuminati.

Aalavandhan:
Manny and Evan met in an Illuminati dinner and the rest is history.

Evan:
Pretty close.

Manny:
We had a long argument about the nature of money actually but then we hung out lol.

Socks&Flops:
I leave you with this explanation of tranching:

Link to the start of the office hours on Discord