Explained: Elastic Supply Tokens

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Decentralized Finance (DeFi) has seen an explosion of new types of financial products on the blockchain. Elastic supply tokens relatively new and less known concepts that fall under the DeFi sector. Through smart contracts, the supply of these tokens is algorithmically adjusted through a process called rebases. That’s why elastic supply tokens are also known as rebase tokens.

These supply adjustments (rebases) occur when tokens are valued above or below the target price, effectively expanding or contracting their supply.

What is an elastic supply token?

Elastic supply tokens refer to an asset whose supply depends on its price and changes accordingly. Elastic supply project’s total token supply is essentially adjustable. Meaning, the total token supply of a particular crypto project adjusts periodically through rebases.

For example, let’s say you have one XYZ coin that is worth $1 today. Tomorrow, you will have two XYZ coins. However, each coin is now worth half of what it was yesterday ($0.5), courtesy of rebasing.

Why do we need elastic supply tokens?

The basic idea behind this concept is that the value of these tokens remains stable, which is achieved through supply adjustments. Elastic supply tokens are often considered similar to stablecoins due to their desire to keep the value stable. However, there are some fundamental differences between the two. The basis of stablecoins is a fixed exchange rate principle, which keeps a stable price by pegging the coin price to another physical asset.

On the other hand, elastic supply tokens aim for a target price through a time-varying token supply. Unlike stablecoins, elastic supply tokens don’t necessarily try to eliminate the volatility. Instead, they aim to reduce it to an extent where the intended value of a token is achieved.

The project’s total supply is adjusted so that with a price increase, the supply is increased accordingly. With an increased supply, the value of each token comes down. Similarly, with a price decrease, the project’s total supply is decreased accordingly to move the price up. As you can see, the same demand and supply logic applies here to drive the project’s total token supply.

Risks

Investing in tokens with an elastic price can be considered risky. With elastic supply tokens, the chances of losing funds could be higher. Sure, this can amplify your gains to the upside, but it can also boost your losses. If rebases occur while the token price is going down, you not only lose money from the token price going down, you’ll also own fewer and fewer tokens after each rebase.

Another reason why investing in elastic supply tokens may be 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:

  • Ampleforth (AMPL)
  • Yam Finance (YAM)
  • BASE Protocol (BASE)
  • DEFI 100 (D100).

Conclusion

Despite being new, elastic supply token projects continue to gain popularity and may open new use cases in the DeFi sector. Tokens with elastic prices might also pose themselves as an alternative to stablecoins in the future.