Elastic supply tokens feature a circulating supply that constantly changes. Their core concept involves adjusting the token supply through a mechanism called "rebasing," rather than relying solely on price fluctuations.
Imagine if the Bitcoin protocol adjusted the number of bitcoins in users' wallets to achieve a target price. For instance, suppose you own 1 BTC today. Tomorrow, you might wake up to find 2 BTC in your wallet, but each would be worth half of what it was yesterday. This is essentially how rebasing works.
Decentralized Finance (DeFi) has driven an explosion of innovative financial products in the blockchain space. We've previously discussed liquidity mining, tokenized Bitcoin on Ethereum, and Uniswap with flash loans. Another major focus in the cryptocurrency realm is elastic supply tokens, also known as "rebase tokens."
Their unique mechanisms enable a wide range of experiments. Let's delve into how these tokens function.
How Do Elastic Supply Tokens Work?
Elastic supply (or rebase) tokens operate on a simple principle: the circulating supply of the token increases or decreases based on price movements. These adjustments occur through a process called a "rebase." When a rebase is executed, the algorithm changes the supply of each token according to the current price.
In some ways, elastic supply tokens resemble stablecoins. Both aim to maintain a target price, and the rebasing mechanism helps achieve this. However, the key difference is that rebase tokens use supply changes (elasticity) to reach their goal.
You might wonder, don't many cryptocurrencies have changing supplies? Yes, they do. Currently, each Bitcoin block mines 6.25 new coins. After the 2024 halving, this number will drop to 3.125 per block. This rate is predictable, allowing us to estimate the number of bitcoins in circulation next year or after the next halving.
Elastic supply tokens work differently. As mentioned, the rebase mechanism periodically adjusts the token's circulating supply. Suppose an elastic supply token aims for a stable price of $1. If the price exceeds $1, the rebase mechanism increases the supply, reducing the value of each individual token. Conversely, if the price falls below $1, it decreases the supply, raising the value of each token.
What does this mean in practice? When a rebase occurs, the number of tokens in a user's wallet changes. Imagine we hold a hypothetical token called rebase USD (rUSD), which targets a price of $1. You deposit 100 rUSD into your hardware wallet. Suppose the price drops below $1. After a rebase, your wallet might only contain 96 rUSD. Simultaneously, the value of each token increases proportionally.
The core principle is that users maintain a constant percentage of the total supply, regardless of rebasing. If you owned 1% of the total supply before a rebase, you will still own 1% after, even though the number of tokens in your wallet has changed. Essentially, your share of the network remains constant, no matter how the price fluctuates.
Key Projects in Elastic Supply Tokens
Ampleforth (AMPL)
Ampleforth was one of the first elastic supply tokens. It aims to be an uncollateralized synthetic commodity, with 1 AMPL targeting a price of $1. Rebasing occurs every 24 hours.
Before launching its "Geyser" liquidity mining program, the project had relatively limited appeal. What makes this initiative particularly interesting is its duration: it distributes tokens to participants over a 10-year period. Geyser is a classic example of how liquidity incentives can generate significant attraction for DeFi projects.
From a technical perspective, AMPL functions as a stablecoin, but its price chart reveals the volatility inherent in elastic supply tokens.
Note that the price chart only shows the unit price of AMPL tokens and does not account for supply changes. Even so, given the substantial volatility, Ampleforth can be considered a high-risk token.
Evaluating elastic supply tokens by market capitalization might be more meaningful. Since the unit price of the token is irrelevant, market cap can serve as a barometer for network growth and appeal.
Yam Finance (YAM)
Yam Finance is another elastic supply token project that attracted widespread attention. The overall design of the Yam protocol combines elements of Ampleforth's elastic supply, Synthetix's staking system, and Yearn.finance's fair launch. YAM also targets a stable price of $1.
YAM was an experiment entirely community-run, with all tokens distributed through liquidity mining. There was no pre-mining or founder allocation—everyone could benefit from token creation through the liquidity mining program.
As a brand-new and untested project, YAM locked $600 million in value into its staking pools in less than two days. This high liquidity was achieved because the YAM pools were tailored for holders of popular DeFi tokens, including COMP, LEND, LINK, MKR, SNX, ETH, YFI, and ETH-AMPL Uniswap LP tokens.
However, a bug in the rebasing mechanism led to an excessive increase in the token supply during mining. Through community efforts, the project used its funds to complete an audit and eventually relaunched with a migration to a new token contract. Today, the future of YAM lies entirely in the hands of its holders.
Risks and Considerations
Elastic supply tokens are highly risky investments. It's crucial to understand them thoroughly before committing funds. Remember, simply looking at price charts won't help, as your token holdings will change after rebasing.
Of course, gains can be amplified or diminished. If a rebase occurs during a price decline, you could lose tokens with each adjustment, compounding your losses!
Their mechanisms are complex and difficult to grasp, making investments in rebase tokens potentially detrimental for most traders. Only those who fully understand the underlying mechanics should consider investing in elastic supply tokens. Otherwise, you won't have full control over your investment or be able to make informed decisions.
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Elastic supply tokens represent one of the intriguing innovations in the DeFi space. As we've seen, these currencies and tokens algorithmically adjust their supply to attempt to reach a target price.
Whether elastic supply tokens remain merely an interesting experiment or can generate significant traction and carve out a niche market remains to be seen. However, it's certain that new DeFi protocols are continually being developed to move toward this goal.
Frequently Asked Questions
What is the main purpose of elastic supply tokens?
Elastic supply tokens aim to achieve price stability through algorithmic adjustments to their circulating supply. Unlike stablecoins, which often use collateral, rebase tokens change the number of tokens held by users to maintain a target price.
How often do rebases occur?
The frequency of rebases varies by project. For example, Ampleforth rebases every 24 hours, while other projects might have different schedules. It's essential to check the specific protocol's documentation for details.
Can I lose money with elastic supply tokens?
Yes, investing in elastic supply tokens carries significant risk. Price volatility combined with supply changes can lead to compounded losses. Understanding the mechanism is crucial before investing.
Are elastic supply tokens the same as stablecoins?
No, while both target price stability, stablecoins typically use collateral reserves or algorithms without changing individual holdings, whereas rebase tokens adjust the supply in users' wallets directly.
How do I track the performance of a rebase token?
Instead of focusing solely on price, monitor the market capitalization. Since the token supply changes, market cap provides a better indicator of the network's overall value and growth.
Where can I learn more about managing such investments?
For those interested in diving deeper, it's advisable to research extensively and consider using platforms that offer detailed analytics and tools for DeFi investments. 👉 Discover comprehensive DeFi tools