When we talk about cryptocurrencies, what automatically comes to our mind is its highly volatile nature — a Bitcoin’s value today can either appreciate or depreciate tomorrow while its supply remains intact.
The blockchain space continues to expand further, all with the help of various rising concepts in Ethereum’s decentralized finance (DeFi) sector, including non-custodial exchanges, stablecoins, NFTS, yield farming, liquidity pooling, flash loans, and many more. One of the newest concepts in DeFi that is still less known to many is the elastic token supply, and that’s what we will be discussing.
In this article, we will all learn the concept of elastic token supply, how they work, when to use them, and why they existed in the first place.
Defining Elastic Supply Tokens
Elastic supply tokens are crypto assets whose supply fluctuates depending upon their price. The supply of these tokens is algorithmically adjusted through a process called rebase, thus calling them rebase tokens alternatively. These supply adjustments automatically occur to expand or contract the supply of tokens when the value of the token falls above or below the given target price.
These supply adjustments are designed to absorb volatility while aiming for a target price through a time-varying token supply, usually every 24-hour depending upon the Time Weighted Average Price (TWAP).
To understand the concept of elastic tokens, let’s discuss this example. Let’s say you have 100 ETH in your wallet at a given time when each token is worth $5 (a total of $500 worth of ETH). In this case, if the value of each token increases to $10, the supply adjustment will automatically contract and apply, essentially leaving only 50 tokens in your wallet. The combined value of all tokens remains the same before and after the rebase at $500 even if the price of the token has doubled. Thus, absorbing the price volatility.
One should also keep in mind that the percentage of the shared tokens in contrast with the total supply always stays the same. If you hold 5% of the total token supply before the rebase, you will still be holding the same token percentage against the total supply even when the number of coins in your wallet has changed, essentially retaining your share of the network regardless of the price or supply.
Now, the big question is, why did elastic supply tokens even exist in the first place? Why do we need this kind of concept in DeFi? Let’s all find out.
Why Elastic Supply Tokens?
The concept of elastic supply tokens highlights that their value remains stable. This is achieved with the help of supply adjustments. Some considered them identical to stablecoins as they share the same concept. But, there are differences between these two assets.
Stablecoins highlight a fixed exchange rate principle. It keeps its price stable by pegging the coin to another asset, usually fiat currencies. On the contrary, elastic supply tokens vouch for a targeted price with a time-varying supply of tokens. Elastic supply tokens do not necessarily attempt to eliminate the volatility, unlike stablecoins, rather they intend to decrease it to such an extent where the sought value of the elastic token is achieved.
The total supply of the project happens to be adjusted with its price increment, making the supply increase accordingly. With an enhanced supply, the value of each token depreciates. Following the same idea with a cost reduction, the total supply happens to reduce accordingly for moving the price up. It shares the same principle of the law of supply and demand.
Risks involved with Elastic Supply Tokens
Investing in tokens with an elastic price is considered risky — serious financial loss is possible with this type of DeFi concept. While it can amplify your gains for the most part, it also boosts your chances of deficits. If rebases occur while the token price is going down, you both lose money from the token price going down and will own fewer and fewer tokens after each rebase!
Another reason why investing in elastic supply tokens is risky is that they are an experimental asset that increases the chances for projects to have bugs in their smart contract code.
Examples of Elastic Supply Tokens
A few examples of elastic supply tokens are Ampleforth ($AMPL), YAM Finance ($YAM), BASE Protocol ($BASE), and DeFi 100 ($D100).
AMPL
Dubbed as an “adaptive money” project, Ampleforth is designed as an uncollateralized, synthetic commodity that is aimed at providing returns that are uncorrelated with the rest of the crypto economy. It’s the largest price-elastic token project to date.
Notably, Ampleforth relies on a Chainlink oracle price feed to determine the AMPL exchange rate. The target price of Ampleforth’s AMPL token is $1.009 in accordance with the U.S. dollar’s 2019 Consumer Price Index (CPI) rate, and the project’s rebases take place daily at 2 AM UTC. Previously these rebases took place at 8 PM UTC, but the schedule was updated last fall to accommodate more data providers.
The project is young with its whitepaper dating to May 2019. The Ampleforth team raised close to $5 million in less than 15 seconds during its initial token offering on Bitfinex’s Tokenix platform in summer of the same year. Two months after the token offering, AMPL was listed on Uniswap and Bancor and slated for inclusion in Compound Finance.
With the recent hype in DeFi and the launching of “Geyser” liquidity mining campaign, Ampleforth has seen its activity soar to heights they’ve never seen before. The most interesting aspect of this campaign is the duration. While most DeFi projects run liquidity mining campaigns for a couple of weeks, Ampleforth’s Geyser is structured to distribute rewards to participants for the next 10 years.
BASE
The BASE token considers the entire cryptocurrency market as one and is pegged at a ratio of 1:1 trillion of the collective market cap.
Truly one in a trillion and uniting the families of cryptos under one umbrella;
So, if the market cap is $1 trillion, its price would be one dollar. And in case the former reaches the milestone of $2 trillion, its price would double.
The idea behind all these elastic supply tokens is to create a synthetic asset whose price correlates with another asset(s) to moderate the supply to achieve the desired price.
YAM
Yam Finance is an initiative backed by the community of Yam token HODLers who believe in the $1 target price, yield farming, and decentralized governance.
In the recent past, Yam achieved a value of 600 million dollars locked in its staking pools within two days before facing bugs in its rebasing mechanism that rendered more tokens than planned.
Ultimately, the community came together to fix the issues and relaunch the project — which is working seamlessly — as of today.
DeFi 100
The primary difference between Base protocol and DeFi 100 is that the former considers the entire crypto market, whereas the latter is concerned with only its league, the Decentralized Finance (DeFi) market.
DeFi 100 is pegged at 1:100 billion of the aggregate valuation of coins & tokens in the DeFi sector.
It is created on the Binance smart chain.
All of the elastic supply tokens that we had discussed so far offer a yield farming feature, allowing their holders to earn a passive income in other currencies or tokens by staking crypto assets into a pool.
The Future of Elastic Supply Tokens
The thought of making insane profits in crypto is surely interesting — who doesn’t want an easy way to grow money anyway? But, this should never be the sole reason for you to invest in elastic tokens. It is advised that you fully understand what this new concept in DeFi is. Setting the right expectations ensures you don’t lose funds more than what you can tolerate.
Elastic supply tokens are gaining a lot of traction lately, bringing in a fair-share of good and bad actors with the latter having the intention of scamming unsuspecting crypto newbies. Users should look out for these ill intentions as bad actors never ran out of illicit ideas. Overall these tokens offer a unique system that aims to trade like a commodity like money. The supply is scarce in theory as the rebase mechanism distributes to users proportionally, making supply and demand the determinants of value.
