There has been an explosion of new sorts of financial products on the blockchain, known as decentralized finance (DeFi), while elastic supply tokens are a relatively new and lesser-known idea in the DeFi space. The quantity of these tokens is algorithmically modified through smart contracts through a process known as rebase. Elastic supply tokens are sometimes known as rebase tokens because of this. This article explains what elastic supply tokens are, why do we need them, and how they work.
Table of contents
- What Are Elastic Supply Tokens?
- How Do Elastic Tokens Work?
- Are There Any Risks With Elastic Supply Tokens?
- Negative and Positive Rebase
- The Weakness of Elastic Supply Tokens
- Top Elastic Tokens
- The Future of Elastic Supply Tokens
What Are Elastic Supply Tokens?
Elastic supply tokens, also known as rebase tokens, are assets whose supply varies based on their price. The amount of these tokens is modified algorithmically through a process known as rebase; hence, the name rebase tokens. When the token price falls above or below the stated target price, supply changes are made automatically to increase or contract the number of tokens. These supply modifications are intended to absorb volatility while striving for a target price via a time-varying token supply, which is adjusted every 24-hour dependent on the Time Weighted Average Price (TWAP).
How Do Elastic Tokens Work?
So, while we know that a handful of stable coins (like USDC, which is backed by the dollar) keep their value, this leaves a lot to be desired. Consider the following scenario: You establish a coin that is linked to a single price (like the dollar). Clearly, if the price of a cryptocurrency is fixed, its demand does not increase the supply. Here’s where the flexibility of elastic supply tokens comes into play.
These algorithmically constructed elastic supply tokens increase and contract in response to demand. Mind-blowing! As a result, as demand grows and prices rise, supply climbs in lockstep until the price reverts to its peg — or vice versa. A peg is essentially a backing by a stable asset (such as fiat money or precious metals) that reduces volatility. This is why it’s referred to as an “elastic” supply token. However, because there is still a lot to be desired, this style has never truly taken a large portion of the market.
Are There Any Risks With Elastic Supply Tokens?
Investing in tokens with a fluctuating price can be a bit risky. The odds of losing money are increased with elastic supply tokens. Sure, this can be profitable as it can help you increase your earnings, but it can also help you increase your losses. If rebases happen while the token price is falling, you will not only lose money, but you will also own fewer and fewer tokens with each rebase. The risk is similar to any other crypto or stock investment.
Negative and Positive Rebase
So, let’s take a look at how a basic rebase works. Let’s say you purchased a rebase token; $1,000 for 1000 ELASTIC, a hypothetical rebase token with a goal price of $1, which is a common price target for several elastic supply tokens. Assume that purchasing pressure drove the price of AAPL up 20% to $1.20. A rebase was initiated, which increased the total supply of ELASTIC by 20% (arbitrary percentage). As the 20% is spread proportionally, the customer will have a positive rebase of 1200 AAPL and an elevated portfolio price of $1,200.
But what if there is true selling pressure instead of buying pressure? To re-peg the price, a negative Rebase occurs, in which the smart contract introduces deflation in an attempt to enhance token demand. Although this approach appears to work in theory, there have been algorithmic stable coins entering death spirals. A price stick below the target in a dropping market will result in a declining market cap, resulting in a progressive loss over time. Although this approach appears to work in theory, there have been instances of algorithmic stable coins entering death spirals.
The Weakness of Elastic Supply Tokens
Elastic tokens are a type of crypto asset that is extremely volatile. The crypto market is highly volatile, as rebase tokens have demonstrated. They are speculative investments, and only experienced and knowledgeable investors who can effectively manage risk should engage. The upside exists when the marketplace is in an upswing, similar to futures trading, and you tend to acquire tremendous traction. Unfortunately, the same result occurs in decline: When each rebase happens, you lose market value and the amount of overall holding, creating a spiral of negative rebases. This is the worst-case scenario, in which supply modifications fail to boost demand and restore price and market cap stability.
Top Elastic Tokens
Despite their infancy, elastic supply token projects are gaining traction and may offer new use cases in the DeFi space. Here is a short list of some of the best elastic tokens to look into.
Ampleforth (AMPL) regulates the circulating supply in response to demand, increasing supply as demand increases and shrinking supply as demand decreases. The value of AMPL is set to $1 via an algorithm. On the other hand, AMPL is not backed by crypto or the dollar, and its goal is to reduce volatility rather than eradicate it.
Origin Dollar ($OUSD)
Origin Dollar (OUSD) adds a novel twist to earning incentives in the blockchain and crypto world. The stablecoin allows you to receive rewards simply by keeping your OUSD in your wallet. Origin Dollar (OUSD) is an ERC-20 stablecoin based on Ethereum. With a 1:1 projected exchange rate with the US dollar. Other major stablecoins like USDT, DAI, and USDC are also backed 1:1. The stablecoin also has a unique decentralized application platform called “The Origin Dollar dApp.” The dApp makes it easier to buy and sell OUSD. Also, giving the most competitive rates for buying and selling OUSD tokens.
Olympus DAO (Protocol Controlled Value – PCV) supports a decentralized reserve money protocol based on the OHM token. To avoid falling below, OHM is backed by a basket of crypto assets in the Olympus Treasury, including DAI and FRAX. In essence, they offer staking and bonding services in addition to the OHM token. They hope to be a worldwide trade unit and a means of exchanging currency in the actual world in the future.
FRAX is the first secure cryptocurrency on the market to offer both collateralized and algorithmic models simultaneously. An elastic supply supports FRAX’s target price of $1. The users themselves can control the Frax protocol — in fact, anyone can request that the collateral ratio be refreshed. Frax is more decentralized and capital-efficient than fiat-backed stablecoins, as well as more stable and dependable than algorithmic stablecoins, thanks to this strategy.
BASE Protocol ($BASE)
Base Protocol (BASE) is a coin whose price is 1:1 trillion, tied to the entire market capitalization of all cryptocurrencies. With BASE, traders may speculate on the whole crypto market with just one token. BASE, for example, is linked to $1 if the crypto market cap is $1 trillion. This elastic token is $2.50 if the crypto market is worth $2.5 trillion.
Yam Finance ($YAM)
On August 11th, 2020, Yam Finance announced and launched its system and price-elastic YAM coin. The initiative was touted as an “experiment in fair farming, governance, and elasticity,” even though it had not been audited. However, more than a few DeFi users soon rallied around Yam’s concept, and the project swiftly gained traction. Notably, the project was built as a DeFi Frankenstein, with Ampleforth’s elastic supply, Synthetix’s staking mechanism, and Compound’s governance module all being used in its code. In addition, however, the Yam protocol was built to purchase up yCRV tokens during positive rebases for Yam’s governable treasury, making it more than the sum of its parts.
The Future of Elastic Supply Tokens
Elastic supply tokens have gotten a lot of press recently, bringing with them greed and criminal actors out to defraud unwary members of the crypto community. Users are urged to watch for all of this, as glitches and amusing acts are never in limited supply in the crypto world. Overall, these tokens provide a one-of-a-kind system that aspires to exchange like money or a commodity. In principle, because the rebase mechanism transmits to users proportionally, supply and demand are the determinants of value.
While the prospect of generating enormous profits is exciting, it should not be the main motivation for purchasing rebase tokens. Instead, investors should make sure they know exactly what they’re getting into before making a decision. Before investing or buying a coin with rebase mechanics, it’s critical to understand the rebase target; setting the appropriate expectations will ensure you don’t lose your money right away.