What Are Elastic Supply Tokens?

Elastic supply tokens use rebases to adjust their circulating supply instead of relying on price volatility. It's as if the Bitcoin protocol could change the amount of bitcoin in wallets to achieve a target price. When a rebase occurs, token holders see their quantities change while the individual value adjusts accordingly. This approach aims to stabilize prices and reduce extreme fluctuations.

Basics

Elastic supply tokens, also known as rebase tokens, are an interesting and rapidly growing segment of the cryptocurrency market. Within the DeFi space, these tokens have garnered a lot of attention due to their unique approach to solving issues with traditional cryptocurrencies. Unlike traditional cryptocurrencies, elastic supply tokens have a dynamic supply that changes in response to market demand. This means that the supply of the token can expand or contract based on the token's price, which can help to stabilize the token's value.

How Does the Elastic Supply Token Work?

Elastic supply tokens, also known as rebase tokens, have a unique way of adjusting their circulating supply based on changes in token price. This is done through a process called rebasing. During a rebase, the token supply is algorithmically increased or decreased, depending on the current price. To simplify, elastic supply tokens are like stablecoins in the sense that they aim for a target price. However, the difference is that they achieve this by changing the token supply.

While some cryptocurrencies already have a changing supply, elastic supply tokens adjust their circulating supply periodically through rebasing. Let's consider an example using a hypothetical token called Rebase USD (rUSD), which targets a price of 1 USD. If the price goes above 1 USD, the rebase increases the supply, lowering the value of each token. If the price goes below 1 USD, the rebase decreases the supply, increasing the value of each token.

Practically, a rebase affects the number of tokens in user wallets. For instance, if you have 100 rUSD in a hardware wallet and the price drops to 0.96 USD, after the rebase, you will have 96 rUSD. However, the value of each token will be higher. The important thing to understand is that your ownership proportion remains the same after the rebase. If you held 1% of the supply before the adjustment, you will still hold 1% afterward, regardless of the changes in the number of coins in your wallet. In essence, your share of the network remains constant, regardless of the token's price.

Elastic Supply Examples

Ampleforth

Ampleforth is an elastic supply token that aims to function as an uncollateralized synthetic commodity, to have 1 token equal 1 USD. The token undergoes rebases every 24 hours to achieve price stability. Despite being a relatively new project, Ampleforth gained attention through a liquidity mining campaign called Geyser, which offers token rewards to participants over 10 years. However, the price chart for AMPL only reflects the individual token price and does not factor in supply changes. When analyzing elastic supply tokens, it may be more meaningful to assess their market capitalization, as it provides a more accurate gauge of the network's growth and traction.

Yam Finance

Yam Finance is a DeFi project that aims to achieve a target price of $1 by combining elements from various other projects. It's fully community-owned and distributes tokens through liquidity mining. Despite being relatively new, Yam managed to attract a lot of attention and $600 million in staking pools in less than two days. However, a bug in the rebasing mechanism caused a larger than planned increase in supply. The project underwent a relaunch and migrated to a new token contract with the support of a community-funded audit. The future of Yam now depends on YAM holders.

Elastic Supply Risks

Investing in elastic supply tokens carries a high level of risk and should be approached with caution. It is crucial to have a complete understanding of these tokens before considering an investment. Merely relying on price charts will not provide sufficient guidance, as the number of tokens you hold will change after rebases occur.

While rebases can potentially amplify gains, they also have the potential to amplify losses. If a rebase happens while the token price is declining, not only will you experience a loss due to the falling price, but your token holdings will also decrease with each rebase.

Given their complex nature, investing in rebasing tokens is likely to result in losses for most traders. It is advisable to invest in elastic supply tokens only if you have a thorough grasp of the underlying mechanisms. Otherwise, you risk relinquishing control over your investment and being unable to make informed decisions.

Conclusion

Elastic supply tokens are an intriguing development in the world of DeFi. These tokens can dynamically algorithmically adjust their supply, aiming to reach a specific target price. The question remains: are elastic supply tokens merely experimental or will they gain substantial popularity and establish their own unique space? It's challenging to predict, but there are ongoing efforts to further explore and enhance this concept within the development of new DeFi protocol designs.