Elastic tokens: the price changes, but not the sum
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Elastic tokens (or elastic supply tokens) are an alternative stablecoin concept for DeFi. These are completely new assets worth taking a closer look at.
Elastic supply tokens are financial assets, the quantity of which depends on the current price. The idea of the creators is to counteract volatility not through pegging to fiat currencies or gold, but through algorithmic regulation of supply. Simply put, you always keep the amount of funds invested in the project, even if the price of its internal token changes.
With smart contracts, the elastic supply is regulated through a process algorithm called “rebasing”. This is why elastic tokens are also called rebase tokens. The supply is adjusted when tokens are valued above or below the base value: there is an actual increase or decrease in their supply on the market.
How does using an elastic token look like in practice?
Suppose today you bought one ABC token at a price of $1. A week later, its price fell to $0.5. On your account you will find 2 ABC tokens for a total of $1. Each token is now worth half of what it was at the time of purchase, but you didn't lose any of your money thanks to the rebase algorithm.
The opposite result will occur if the rate of the elastic token rises. In the wallet you will find 0.5 ABC if its price rises to $2.
There are several projects currently on the DeFi market using rebase tokens:
- Ampleforth (AMPL)
- Yam Finance (YAM)
- BASE Protocol (BASE)
- DeFi 100 (D100)
It is unlikely that they will be able to earn money. But you're not trying to short stablecoins, are you? Of course, it is theoretically possible, but there is little practical sense in such trading.
What is the difference between elastic tokens and stable tokens?
Elastic supply tokens are considered similar to stablecoins due to their store of value principle. However, there are fundamental differences between them.
Stablecoins are based on the principle of a fixed exchange rate, which supports the price by pegging a coin to some physical asset (fiat, gold, security). And elastic supply tokens target the base price through a changing supply.
The circulating supply of project tokens is adjusted in such a way that when the price decreases, the supply increases and the price, accordingly, automatically equalizes to the previous level. When the price rises, the process is reversed. Therefore, a strict algorithm for balancing supply and demand is applied here by changing the total amount of circulation of tokens.
Risks when using elastic tokens
Investing in tokens with a flexible price can be considered risky: the probability of losing funds can be high.
Firstly, it is still an experimental asset that has not received wide distribution. Elastic supply tokens have recently appeared on the market and therefore not all bugs in smart contracts have been identified.
Secondly, it is still not clear enough how such tokens react to artificial price manipulation if it occurs in a short period of time. Will the algorithm have time to equalize the number of tokens in circulation during a quick pump and dump?
It is possible that the principle of rebasing will someday replace the usual peg to fiat, and elastic tokens will force USDT out of the market. But for now, it’s enough for you to know that there are such developments, and that the principle of elastic supply opens up new use cases for DeFi.