Tranching

Tranching is a mechanism that splits the volatility of an underlying asset (i.e., AMPL) into two or more new assets with unique risk profiles (i.e., SPOT, stAMPL).

This gives AMPL unlimited utility as a foundational DeFi asset. By splitting the risk across several tranche assets, it becomes possible to create both safer, relatively stable assets and riskier, leveraged assets.

The Ampleforth ecosystem utilizes the Buttonwood Tranche protocol to create tranches. This protocol accepts a deposit of base tokens and splits them into tranche tokens at a predetermined ratio. These tranche tokens have a maturity date, after which they can be fully redeemed for the original underlying base tokens.

Diagram of AMPL tranching using the Buttonwood Tranche Protocol | Source: Documenting AMPL

To resegment the volatility associated with its rebasing mechanic, AMPL uses the Buttonwood Tranche protocol to create two new assets: SPOT and stAMPL.

The Tranche protocol divides AMPL into a specific ratio of 33% senior tranches (AMPL-A) and 67% junior tranches (AMPL-Z).

The senior tranches represent the safest 33% of AMPL's supply and are most protected from the volatility of the daily rebase. In contrast, the junior tranches represent the top 67% of the rebase and are at a higher risk of volatility.

Here is another way to visualize this concept:

Representation of SPOT vs stAMPL's representation of AMPL's supply volatility

The red bricks above (stAMPL) are affected by the rebase first. The blue bricks (SPOT) are affected by the rebase last. This is why SPOT is how SPOT is insulated from volatility (but not immune from it). For SPOT to be directly impacted by the rebase, AMPL's supply would have to decline over 67% before tranches are rotated.