AMO Overview
A framework for composable, autonomous central banking puzzle pieces
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A framework for composable, autonomous central banking puzzle pieces
Last updated
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The second (V2) expansion of FRAX focused on the idea of fractional-algorithmic stability by introducing the idea of the “Algorithmic Market Operations Controller” (AMO). An AMO module is an autonomous contract(s) that enacts arbitrary monetary policy so long as it does not change the FRAX price off its peg. This means that AMO controllers can perform open market operations algorithmically (as in the name), but they cannot arbitrarily mint FRAX out of thin air and break the peg. This keeps FRAX’s base layer stability mechanism pure and untouched, which has been the core of what makes our protocol special and inspired other smaller projects.
We can generalize the to any arbitrarily complex market operation to create a Turing-complete design space of stability mechanisms. Thus, each AMO can be thought of as a central bank money puzzle piece. Every AMO has 3 properties:
Decollateralize - the portion of the strategy which lowers the CR
Market operations - the portion of the strategy that is run in equilibrium and doesn't change the CR
Recollateralize - the portion of the strategy which increases the CR
With the above framework clearly defined, it's now easy to see how Frax V1 is the simplest form of an AMO. It is essentially the base case of any possible AMO. In V1, decollateralization allows for expansion of the money supply and excess collateral to flow to burning FXS. Recollateralization mints FXS to increase the collateral ratio and lower liabilities (redemptions of FRAX). The base layer fractional-algorithmic mechanism is always running just like before. If FRAX price is above the peg, the CR is lowered, FRAX supply expands like usual, and AMO controllers keep running. If the CR is lowered to the point that the peg slips, the AMOs have predefined recollateralize operations which increases the CR. The system recollateralizes just like before as protocol liabilities (stablecoins) are redeemed and the CR goes up to return to the peg. This allows all AMOs to operate with input from market forces and preserve the full design specs of the V1 base case.
AMOs enable FRAX to become one of the most powerful stablecoin protocols by creating maximum flexibility and opportunity without altering the base stability mechanism that made FRAX the leader of the algorithmic stablecoin space. AMO modules open a modular design space that will allow for constant upgrades and improvements without jeopardizing design elegance, composability, or increasing technical complexity. Lastly, because AMOs are a complete "mechanism-in-a-box," anyone can propose, build, and create AMOs which can then be deployed with governance as long as they adhere to the above specifications.