What are Elastic Supply Tokens?

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What are Elastic Supply Tokens?

Mar 4
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In brief

  • Elastic supply tokens are a type of tokens belonging to the DeFi sector.
  • The tokens have their supply change to ensure the value of the coins.
  • If the targeted price is $1 and the coin price grows, to $2, the supply will double.
  • Elastic supply tokens are very risky and volatile, and not recommended for beginners.

The cryptocurrency industry’s DeFi sector exploded in mid-2020, attracting users, money, attention, and developers. In less than half a year, the DeFi sector’s Total Value Locked (TVL), which is the amount of money used in DeFi projects, went from $1 billion in June 2020 to $41 billion in February 2021. Meanwhile, DeFi brought a mountain of new services, such as staking, decentralized lending and borrowing, yield farming, decentralized exchanges, and more. One of its products — something that is still fairly new and not known to most users — is the concept of elastic supply tokens.

If you have never heard of elastic supply tokens, don’t worry — you are not the only one. While a very interesting concept, elastic supply tokens kind of managed to slip by undetected.

This type of token is engineered through the use of smart contracts, and its revolves around changing the token’s circulating supply whenever the price changes, in order to reduce the coins’ volatility.

These tokens, which are also known as rebase tokens, expand and contract their supply to accommodate the value of your investment. Their goal is similar to that of stablecoins, but they work in an entirely different way.

Elastic supply tokens are imagined to achieve similar results as stablecoins, only not by pegging the coins to any other asset, but by controlling their circulating supply.

Comparing the Tokens

To help you understand this better, let’s compare three types of tokens — regular tokens, stablecoins, and rebase (elastic supply) tokens.

Your regular token, such as the ones belonging to most projects, are highly volatile. Just think of Bitcoin coins, which grow by thousands of dollars, only to drop by thousands more, over and over again. Since they are not tied to any real-world asset, their price fluctuates based on demand, which is, in turn, changing due to the news, forecasts, various events, and more. These are great for trading, as they allow you to earn money, but they can also ruin your wealth, if you wake up one morning and find out that BTC has dropped by $10,000 per coin overnight. Coins like these are not the best way to keep your money safe.

On the other hand, you have stablecoins, such as Tether (USDT), USD Coin (USDC), Gemini Dollar (GUSD), and others. These are usually pegged to a traditional currency, also known as fiat currency, such as the US dollar. As such, they have a stable price, since each coin is backed by a certain amount of fiat money. For example, each Tether (USDT) coin is backed by $1, and so Tether’s price is always $1.

Elastic supply coins, on the other hand, also aim to maintain stability, but not of each coin’s price, but rather of your supply of coins. Their supply changes to accommodate the growing or dropping price. Let’s say that you invested $100 into a hypothetical elastic supply token whose price is $1. This would mean that the amount you own is now equal to $100. If the coin’s price changes, so does the supply, and the next day, you might have 200 tokens, where each is worth $0.5. Alternatively, you might wake up to having only 50 tokens, where each is worth $2.

As you can see, you will still have $100 worth of tokens in your possession, only the amount of tokens that you own changes based on its value.

This change happens during the event called a rebase, which is essentially a process that ensures that the value of your investment remains the same by changing the supply. This is why we can say that they are similar to stablecoins, but they can still remain decentralized, unlike most stablecoins that are controlled by a company that ensures that the supply of fiat matches the supply of coins.

Of course, there are also decentralized stablecoins that use other cryptos to control the value of their coins, but that is a topic for another time.

  • Regular coins and tokens in the crypto industry have their price move due to demand
  • Stablecoins’ prices are stable as they are pegged to real-world assets
  • Elastic supply tokens’ price moves, which triggers rebases, which then modify the coin’s supply
  • Elastic supply tokens are highly experimental and very risky to invest in

Benefits and Drawbacks of Elastic Supply Tokens

The main benefit of elastic supply tokens is the fact that you get to invest in cryptocurrencies without fear of losing the value of your investment overnight, due to some event that may have an unforeseen impact on the market. Rebase tokens act as a commodity market, and as such, they bring commodity market properties.

There are plenty of popularly traded commodities, such as oil, noble metals, or other goods. Rebase tokens function similarly, although they get to track the overall market, as well as their own market, and adjust their supply depending on the changes that occur.

Owning these tokens might also be beneficial because it is estimated that money will flow towards these types of tokens, since they act as commodities and rely on supply and demand.

On the other hand, there are some negatives to this type of token. Traders and investors should remember that this is a very new concept in the crypto industry, which is itself still new and unregulated. As such, every innovation comes with even greater risks than usual, as no one can know how exactly will the market behave. Users should also remember that usual rules for crypto trading do not apply here, and that it might be useless to look at the charts, since the number of tokens changes when the rebases mechanism gets triggered

This could either amplify your gains, or do the same with your losses. If the rebases occur as the coin’s price is dropping, you will lose the money from the token price going down, and you will own fewer tokens with each rebases.

The process can be quite tricky to understand, which is why investors should avoid these tokens if they don’t have a full grasp of how everything works, and what the potential consequences might be. Basically, you should only ever invest in them if you completely understand what you are doing, and what risks come with doing so. Otherwise, you are bound to experience losses.

In the end, the system is rather interesting, and while it works in theory — it can be quite risky in practice.

So far, it was discovered that the elastic supply tokens work well in theory, but in practice, they could be highly volatile, which could trigger losses and even a death spiral.

What Are Some Elastic Supply Tokens You Can Look Into?

There are already several elastic supply tokens that you can check out. We will talk about a few of them now, so that you can get some idea of where to start, but keep an eye out — elastic supply tokens might become a new trend where plenty more could emerge.

Experimental coins like the ones we are about to talk about should only be invested in by those who understand the risks, and have a deep understanding of how these tokens and mechanisms behind them work.

1. Ampleforth (AMPL)

The first token on our list is Ampleforth, which is also one of the first elastic supply tokens to emerge in the DeFi sector. This particular project’s goal is to serve as an uncollateralized synthetic commodity. Each AMPL token is meant to have a price of $1, although this is subjected to change due to the accompanying mechanisms. Rebases happen every 24 hours, so you can expect the change in supply to occur once per day.

Ampleforth is also known as the adaptive money project, and it uses the Chainlink oracle price feed to determine the coin’s exchange rate. AMPL whitepaper first emerged in May 2019, while the coin itself was launched on Bitfinex’s launchpad during the summer of the same year. The team managed to raise around $5 million in barely 15 seconds, indicating huge interest in the project.

Soon after that, the coin was listed on Bancor and Uniswap. With the rise of DeFi in 2020, it also saw a lot more activity than before, particularly due to the launch of the liquidity mining campaign known as Geyser. This particular campaign differs from other liquidity mining campaigns in its length. Most campaigns last for a few weeks, while this one will distribute rewards for an entire decade.

The coin itself is highly volatile, although its supply changes mostly accommodate the change in the price of each individual token. At the time of writing, Ampleforth’s price sits at $0.8561 per coin.

2. RMPL (RMPL)

Another elastic supply token to look into is RMPL, which is actually a fork of Ampleforth. It is a token that uses randomized rebasing, unlike AMPL, which has a fixed schedule about when rebasing is supposed to happen.

RMPL’s rebases take place in 48-hour windows, although on average, they happen every 24 hours. They also track a $1 USD price target, changing the coin’s supply based on how much it strays from this price. Rebases tend to begin when the price goes beyond $1.05 or below $0.95.

As for the reason behind the randomization, it is meant to combat market manipulation, so that it wouldn’t be as easy to make large sell-offs and impact the price immediately after the process is completed.

RMPL’s team, which still remains anonymous, conducted the token’s pre-sale in early August 2020. The token was listed on Uniswap the very next day following the pre-sale.

At the time of writing, RMPL price sits at $0.8246, indicating that the coin is also very volatile, as this should not happen due to randomized rebases. In the last 24 hours alone, it lost 21.71% of its value, although this is the case with the entire crypto industry, as the price drop was led by Bitcoin and Ethereum.

3. Yam Finance (YAM)

Yam Finance is another example, whose YAM token saw its launch on August 11th, 2020. The project was still unaudited, and it was presented as an experiment in fair farming, governance, and elasticity, as its team pointed out. The developers also insisted that anyone who engages with the token needs to be cautious. In fact, they were the ones who sought out a proper professional audit, which they believed was necessary for the project to get any meaningful use.

The meaningful use did come, however, and YAM’s design quickly attracted quite a few people in the DeFi sector.

Yam Finance is a strange project, even among other elastic supply tokens. Its code is leaning on several other projects’ designs, and it borrowed some elements from them. For example, it took Ampleforth’s elastic supply, which made it an elastic supply token. It took Compound’s governance module, as well as Synthetix’s staking system. The project even developed further on its own, surpassing these basic elements, as it was also designed to buy up yCRV tokens when positive rebases were taking place.

Like the others, it targets the price of $1 for its tokens. However, its rebases happen much more frequently — twice per day, or once every 12 hours. It was distributed via yield farming to its stakers, with the initial pools based around ETH/AMPL Uniswap V2 LPtojens, as well as a variety of other DeFi tokens.

The project exploded after going live despite the warnings from its own developers, mostly due to the possibility of farming. In a single day, the protocol brought in over $600 million in TVL, and YAM, which is supposed to have a price of $1, skyrocketed to $167. That was its peak, and after that, things went down the hill for Yam Finance.

Soon after the launch, a bug was discovered in the project’s rebasing system. The bug, if exploited, would allow for massive amounts of YAM to be minted, and definitely a lot more than it was supposed to be. This threatened to destroy the coin’s price, but also to make governance impossible.

However, before they could fix the issue, the developers needed YAM holders to vote on the governance proposal to fix the bug. The proposal failed, and the rebase that followed rendered Yam ungovernable. With the project marked as a failure, the developers started working on the YAMv2 system, and then YAMv3 after that. All three versions are currently listed on CoinMarketCap.

The idea was for the users to migrate their YAM coins and convert them to YAMv2. Then, after the audit was completed, users would be able to move their YAMv2 coins and convert them into YAMv3 via a smart contract.

Elastic supply tokens are a relatively young concept, and definitely an interesting idea. They do have their flaws and weaknesses in practice, as mentioned, so anyone interested in interacting with them needs to be extremely cautious. But, the projects themselves do have potential, and could someday become the next major trend of the crypto/DeFi sector.