I’ve watched digital markets long enough to notice something most people overlook: volatility itself can be a resource.
What Is Deflationary Compounding?
Deflationary compounding is a financial mechanism that systematically reduces token supply to increase token value through the mathematical certainty of automated market makers (AMMs).
Think of it like a hydroelectric dam. The dam doesn’t create energy by itself, it captures energy from water that would flow regardless. Similarly, deflationary compounding doesn’t create value from nothing, it captures value from market movements that would happen anyway.
How It Works
The system has three key components:
- Fixed Spread Mechanism: Two assets are positioned with a maintained 0.6% spread between them.
- Volatility Filtering: When market movements cause trading across this spread, a portion of tokens is permanently burned out of existence.
- AMM Mathematics: In an automated market maker using the constant product formula (X × Y = K), reducing token supply mathematically increases price relative to paired assets.
This isn’t speculation or opinion, it’s algorithmic certainty.
Why This Matters
Markets move constantly. Traditional approaches try to predict these movements or minimize their impact. Deflationary compounding takes a different approach, it harnesses movement as a resource.
Each time volatility causes trading across the spread, tokens burn. As tokens burn, remaining tokens become more valuable within the AMM. Higher value attracts more volume, creating more volatility, causing more burns, and continuing the cycle.
Alice: The Implementation
Alice is an open protocol built on the Stellar network that implements deflationary compounding. She is intended to provide steady returns against the US dollar by capturing value from the volatility of liquidity you provide.
Unlike systems that rely on new participants to generate returns, Alice captures existing value from market friction, the 0.6% spread between assets that would otherwise dissipate.
What Makes This Different
This system differs from:
- Traditional deflationary tokens that rely solely on scarcity without an active mechanism
- Arbitrage which captures obvious price differences rather than natural movement
- Ponzi schemes which require new participants rather than generating value from existing market activity
The Invitation
I’ve built Alice as an experiment in what I call Conceptual Finance, approaching financial mechanisms as philosophical constructs rather than purely mathematical ones. It’s my answer to a third option for funding Universal Basic Income, neither taxation or money printing, but mining value from mathematics alone.
The system isn’t theoretical, it’s a working protocol on Stellar that anyone can interact with. It doesn’t promise future functionality or speculative returns, but operates according to mathematical principles to capture value that would otherwise be lost.
Consider exploring this concept not just as a financial tool, but as a new way of thinking about volatility and value. My personal belief is that this is a viable option for funding post scarcity economics.
I’d love to know what you think.