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What Does it Mean to Hedge AMPL Using the Elastic Protocol?

In markets, various participants engage in hedging strategies that are designed to reduce their exposure to downside financial risk, but they also can limit upside potential.

The primary risk associated with the Ampleforth token (AMPL) is negative rebases, which makes typical asset management strategies difficult to implement. Specifically:

  • Generally, buyers of crypto assets adopt a "buy and hold" strategy, where they are prepared to purchase and asset and hold it for months to years, depending on their risk tolerance and time preference
  • Another strategy is dollar cost averaging (DCA) into a position in order to improve upside potential

Both the buy and hold and DCA strategies are difficult to implement with AMPL due to the negative rebase:

  • Buy and Hold: The negative rebase makes buying and holding for long periods of time difficult, as supply volatility (combined with price declines) can erode a holder's capital significantly
  • Dollar Cost Averaging (DCA): While AMPL can be purchased during price declines, negative rebases can make it more difficult to break even on a position, depending on the time horizon

The Elastic Protocol provides market actors holding the AMPL token with the ability to engage in various hedging strategies, as outlined below.

Hedging Strategy IdentifierHedging Strategy
Strategy AWhat: Use EEFI to go long on AMPL, but avoid negative rebases

Because EEFI's supply is influenced by AMPL directly (vault emits, buys/burns EEFI based on AMPL's rebase status) individuals can use EEFI to take a long position on AMPL.

As AMPL's supply grows, EEFI's supply will decline (EEFI's price may fluctuate as AMPL experiences positive rebase cycles because EEFI is bought and burned during positive AMPL rebases).

This provides exposure to AMPL without the negative rebase, which can be beneficial for those interested in pursuing a buy and hold or DCA strategy.
Strategy BWhat: Earn yield during negative rebases

Another hedging strategy is to use the Elastic Vault to earn yield during negative rebases. AMPL holders can deposit a portion of their AMPL position into the vault to avoid negative rebases, and earn EEFI yield (EEFI is not subject to negative rebases).

Although deposited AMPL is locked in the Elastic Protocol for 90 days, individuals have the opportunity to earn EEFI during neutral/negative rebase periods and benefit from EEFI supply deflation during positive rebase (and earn ETH token rewards).

Like all hedging activities, strategies A and B, reduce AMPL holders' downside risk, but also limit their upside. Most importantly, they will not have access to AMPL deposited into the Elastic Protocol immediately, which does not allow them to sell this AMPL during positive rebase cycles. However during positive AMPL rebases, Elastic Protocol users:

  • Earn OHM
  • Benefit from AMPL-driven demand for EEFI, and associated declines in EEFI supply

Note: The hedging strategies outlined above should not be considered financial advice, or an inducement to buy, hold or trade any asset mentioned above (AMPL, EEFI, OHM, etc.).