Understanding the Elastic Vault: Options and the Benevolent Whale
There are a number of ways to understand the innovations within the core Elastic Vault, including as a quasi-options strategy —— specifically, those depositing into the vault have confidence that the price of AMPL will increase over time, resulting in positive rebases and EEFI buys/burns. For a basic primer on options view this video.
Another helpful way to look at the Elastic Vault is as a benevolent market whale dedicated to acquiring EEFI. During market uptrends (and positive AMPL rebases), the vault automatically buys and burns EEFI and provides vault users with an automated diversification strategy. The vault potentially provides depositors with leveraged returns and a means of hedging against neutral and negative rebases experienced by AMPL (and other rebasing assets deposited into sub-vaults in the future).
|Benevolent Whale Analogy
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Call Options Analogy
In some respects, the Elastic Vault can be viewed as a quasi-call option for those who choose to deposit AMPL into vault in order to earn EEFI. This is even more true for those who opt to participate in the vault's market cycles by acquiring EEFI during market downtrends. Elastic Vault participants can potentially get 'leveraged' (meaning that AMPL deposited into the vault are utilized to automatically buy and burn EEFI) returns when markets are in an uptrend. This can be achieved without liquidations and margin calls.
Going further with the options comparison, when market participants deposit AMPL or buy/sell EEFI via decentralized exchanges, they are essentially willing to “be your yield” or support the attribute of EEFI as decentralized yield and take on that risk. This is in exchange for the right but not the obligation to sell EEFI tokens they’ve acquired at a higher price in the future. How high will vary by player. This could be a short term play for a day trader who just wants quick returns and does not care about a decentralized leverage effect. Or a long term play by a crypto investor who wants to experience max 'leverage' during prolonged uptrends. There is no specific maturity date so each free market player decides what's best for them. Both can find opportunity. The lack of a maturity date is why this is quasi and not an actual option. But for AMPL depositors the 90 day minimum lock up adds to the Options analogy...
Free market players may be inspired to engage in acquiring EEFI during downtrends because AMPL is permanently deposited into the core Elastic Vault by the Elastic Finance DAO. Permanent AMPL is not withdrawn from the vault after the mandatory 90 day lock up period. Instead this AMPL continues to buy and burn EEFI tokens automatically —— whenever AMPL is in positive rebase. (The same strategy will be applied with other rebasing assets deposited into sub-vaults in the future.)
This regular buying and burning process is the anticipated 'leverage effect'. Whether or not AMPL in the vault is used to automatically buy and burn EEFI depends on overall market forces, but permanent deposits provide confidence to vault participants that automated vault activities will continue. That could be a driving factor for individuals to initiate or increase engagement with the Elastic Vault.
- For the core Elastic Vault, when users hedge AMPL with the Vault and earn EEFI, the free market of participants are willing to “be their yield” and take on the risk of acquiring EEFI during downtrends and supporting its value in exchange for the potential force multiplier upside or leveraged effect on EEFI’s value in the future (due to positive AMPL rebases).
- We use options as an analogy because it’s similar to the way insurers take on investor’s risk with options contracts when they take the other side of the contract. The core Elastic Vault strategy is unique from options because there is the potential for improved outcomes. For the core Elastic Vault, this can come in the form of potentially leveraged returns in the form of daily buys and burns of EEFI, which can create a force multiplier effect during positive AMPL rebases.
- Each market participant will decide their own short- to long-term strategy. Since the Elastic Vault serves as First Buyer or Default buyer of EEFI, the amount of permanent AMPL deposits may determine the willingness of free market participants (arbitrageurs, traders, degens, investors etc) to engage with acquiring EEFI. A.K.A being your yield. This also includes holding on to their EEFI or utilizing it in some way other than directly selling it. Other use cases of EEFI will be determined as sub-vaults are launched.
- Permanency Theory: The more permanent AMPL in the core Vault (and other assets in sub-vaults in the future), the more participants will engage in buying activities of EEFI to benefit from the force multiplier effect.
Example of Potential Force Multiplier Effect: Elastic Vault AMPL deposit value goes up (2x), AMPL enters into positive rebase (uptrend), and EEFI token value goes up (8x).
Note: This example is provided for illustrative purposes it is not a guarantee or promise of a specific financial/economic outcome.
EEFI: Preventing Hyper-Inflation
If AMPL deposited into the core Elastic Vault does not enter positive rebase for 45 days, EEFI is no longer minted by the vault (except for the small amount provided to wallets that call the vault's daily rebasing function). Learn more.
The hard cap of 45 days in negative or neutral rebases may also give the free market confidence to engage in EEFI acquiring activities as token hyper inflation is near impossible. Also, if the market is unwilling to take on the risk of acquiring EEFI, the Elastic Vault will do so automatically, as long as AMPL enters positive rebase territory. The presence of permanent AMPL deposits will ensure this process takes place consistently and reliably. Finally, as more tokens are added to the Vault, its automated activities will incentivize market cycle activities around its functionality.
Benevolent Whale (During Positive Rebase/Uptrends)
It's also helpful to look at the Elastic Vault as a benevolent market whale dedicated to acquiring one token: EEFI. Those hedging AMPL in the vault understand that the whale (vault) will automatically buy and burn EEFI, providing depositors with leveraged returns.
Where Does the ‘Yield’ Come From? The Whale: During uptrends The Vault acts as a market whale. EEFI purchases are funded by “yield” or “interest” earned from the Vault’s AMPL deposits. Although it's not traditional yield, the expansion of supply from AMPL aka positive rebase or “yield” earned on assets deposited are used to power EEFI buys and burns daily during positive AMPL rebase periods.
The whale's buying power is fueled with deposits into the Elastic Vault. This means the more people collectively deposit in the Vault the higher the amplification or leveraged effect can be when the market enters an uptrend and AMPL is in positive rebase. While it is impossible to precisely calculate an APY from vault activities it can vary widely, for example:
- 0% (when the vault is not emitting rewards),
- 70% when AMPL is in a modest positive rebase period,
- 7,000,000%+, should AMPL go into an extended positive rebase cycle
Note that there is no guarantee of a specific level of yield or returns from the Elastic Vault. In some cases, should AMPL (or other rebasing assets deposited into sub-vaults), go into extended negative rebase (prolonged price declines, or a lengthy negative rebase period), the vault may not emit EEFI rewards or buy and burn EEFI. Please review risks and disclaimers here.