Elastic Supply Tokens Explained

Introduction

Decentralized Finance (DeFi) is driving the rapid growth of innovative financial products in the blockchain space. Previously, we explored liquidity mining, tokenized Bitcoin on Ethereum, Uniswap, and flash loans. Another intriguing area is elastic supply tokens, commonly referred to as "rebase tokens." Their unique mechanisms support various experiments. Next, we will take a closer look at how these tokens operate.

What are Elastic Supply Tokens?

The mechanism of elastic supply (or rebase) tokens essentially involves adjusting the circulating supply of the token in response to price fluctuations. This adjustment is executed through a mechanism known as "rebase." When a rebase occurs, the supply of each token is adjusted according to a specific algorithm based on the current price.

In some ways, elastic supply tokens are similar to stablecoins. Both aim to maintain price stability, and the rebase mechanism helps achieve this goal. However, the main difference lies in the fact that rebase tokens achieve this through changes in supply.

You might wonder, aren’t the supplies of many cryptocurrencies constantly changing? Indeed, they are. Currently, each Bitcoin block has a mining reward of 6.25 BTC, which will decrease to 3.125 BTC per block after the halving in 2024. This ratio allows us to predict the future number of Bitcoins in circulation.

The operation of elastic supply tokens differs from this. As mentioned, the rebase mechanism periodically adjusts the circulating supply of the tokens. For example, if an elastic supply token aims to maintain a price of $1, when the price exceeds $1, the rebase mechanism will increase the supply, thereby lowering the value of each token. Conversely, if the price falls below $1, the supply will decrease to enhance the value of each token.

What does this actually mean? When a rebase is executed, the number of tokens in a user's wallet will change. Suppose you hold rebase USD (rUSD), which aims for a price of $1. If you deposit 100 rUSD in your hardware wallet and the price drops below $1, after the rebase, you might only have 96 rUSD left in your wallet, but the total value of your holdings will correspondingly increase.

The core idea of this token is that the user's holding amount maintains a relatively stable proportion to the total supply, meaning it does not change due to the rebase. If you held 1% of the total supply before the rebase, even if the number of tokens you hold changes afterward, you still own 1% of the total supply. Essentially, regardless of price fluctuations, your share of the tokens in the network remains constant.

Example of Token Rebase

Ampleforth

Ampleforth is one of the first elastic supply tokens, designed to function as a non-collateralized synthetic asset, with a target price of $1 for 1 AMPL. The rebase mechanism for this token is executed every 24 hours.

Prior to launching a liquidity mining initiative called "Geyser," the project garnered relatively little attention. However, its appeal lies in the sustainability of this program, which will continuously distribute tokens to participants over the next ten years. Geyser is a typical example of creating attractiveness for DeFi projects through liquidity incentives.

From a technical standpoint, Ampleforth possesses the characteristics of a stablecoin, with its price volatility clearly evident on charts.

Price Volatility of AMPL

The target price of AMPL is $1, but its actual price may experience significant fluctuations. It is important to note that price charts only display the unit price of the AMPL token without considering changes in supply. Nevertheless, given its pronounced volatility, Ampleforth is likely to be viewed as a high-risk investment option.

From a market capitalization perspective, assessing elastic supply tokens may be more reasonable. Since the unit price of the token is not paramount, market capitalization can better reflect the development and appeal of the network.

Yam Finance

Yam Finance is another prominent elastic supply token project. The Yam protocol combines Ampleforth's elastic supply, Synthetix's staking system, and Yearn.finance's fair distribution, aiming to stabilize the price at $1.

YAM is a fully community-driven experimental project, and all tokens are distributed through liquidity mining. There was no pre-mining or founder allocation; anyone can participate in the liquidity mining program and enjoy the rewards from the tokens.

As a brand-new project, YAM locked in $600 million in value in less than two days. This high liquidity was achieved through a special design of the YAM pools targeted at holders of popular DeFi tokens, including COMP, LEND, LINK, MKR, SNX, ETH, YFI, and ETH-AMPL Uniswap LP tokens.

However, the rebase mechanism may pose risks, leading to an increase in the supply of mined tokens. With the community's collaborative efforts, the project underwent an audit of its funds and ultimately relaunched, migrating to a new token contract. Today, the future of YAM is entirely in the hands of YAM holders.

Risks of Elastic Supply Tokens

Investing in elastic supply tokens carries significant risks, and it is essential to fully understand their operational mechanisms before committing funds. Consulting price charts may not offer much assistance, as your token holdings will change after a rebase.

Of course, returns can be amplified or diminished. If a rebase occurs when the token price is falling, you will not only face a loss in price but also a reduction in the number of tokens you hold!

Due to the complexity of their mechanisms, many traders may incur losses when investing in rebase tokens. A deep understanding of the underlying mechanisms is crucial for investing in elastic supply tokens. Otherwise, you may struggle to manage your investments and make informed decisions.

Conclusion

Elastic supply tokens represent an innovative development in the DeFi space. As we have seen, these tokens adjust their supply algorithmically in an attempt to maintain a target price.

Are elastic supply tokens an interesting experiment that can create significant appeal and open up new markets? This remains to be seen. However, it is certain that some emerging DeFi protocols are continuously striving toward this goal.

Risk Warning

While the cryptocurrency market offers significant growth potential and innovation opportunities, it also carries a high level of market risk and price volatility. The value of crypto assets can fluctuate dramatically in a short period, potentially leading to substantial financial losses for investors. Additionally, the cryptocurrency market faces multiple risk factors, including technical risks, legal and regulatory uncertainties, cybersecurity threats, and market manipulation. We strongly advise users to conduct thorough research and due diligence before making any investment decisions and to consult professional financial advisors. All investment decisions are made at the user’s own risk. Thank you for your trust and support of Venkate!

Building The Future of Crypto Exchange

Where Meet a Confluence of Inspiration and Innovation

Venkate Exchange is an innovative cryptocurrency trading platform, drawing its name and inspiration from Venkateswara—a deity symbolizing wealth and prosperity in Indian mythology.