## 1.5 Thinking Fast & SlowThe Ampleforth protocol establishes a set of initial conditions and incentives for the network. And although the protocol propagates price information into supply, it’s the actors that propagate supply information back into price. ## Inductive ExplanationTo illustrate, it helps to separate fast traders, Slow Trader: Let’s imagine Alice is a slow trader who buys and sells infrequently. She checks in at time, t0, and sees that she has 1 Ample worth $1.2. Later she checks in at t1, and sees that she now has 1.2 Amples each worth $1.*Alice*at t0: 1 coin, worth $1.2/coin*Alice*at t1: 1.2 coins, worth $1/coin
Since Alice′s net balance at t0 and t1 are equivalent, there isn’t any compelling reason for her to buy or sell before or after the state change. But for a fast trader, there is an additional state to consider: Fast Trader (Expansion): Let’s imagine Bob is a fast trader who buys and sells frequently. He checks in before expansion at state t0, again while the system is expanding at state t1, and finally after expansion at state t2.*Bob*at t0: 1 coin, worth $1.2/coin*Bob*at t1: 1.2 coins, worth $1.2/coin (sell opportunity)*Bob*at t2: 1.2 coins, worth $1/coin
At t1, there’s a limited opportunity for Bob to sell more units than he could have at t0 for the same price before other fast traders take advantage of the opportunity and drive the price back down. And the opposite is true in the event of contraction: Fast Trader (Contraction): Let’s imagine Charlie is a fast trader who buys and sells frequently. He checks in before contraction at state t0, again while the system is contracting at state t1, and finally after contraction at state t2.*Charlie*at t0: 1 coin, worth 0.8/coin*Charlie*at t1: 0.8 coins, worth 0.8/coin (buy opportunity)*Charlie*at t2: 0.8 coins, worth 1/coin
Similarly, at t1 there’s a limited opportunity for fast traders to purchase a greater percentage of the network from Charlie (should he be willing to sell) for the same price they could have at t0, before other fast traders take advantage of the opportunity and restore the price to its equilibrium value. |