When it comes to the world of tokens, there are various concepts one needs to understand. Even though all these concepts might sound complex, they’re fairly easy to grasp if explained in a simple language. In our series of explainer posts, today, we’ll get ourselves familiarized with the concept of elastic supply tokens.
What are Elastic Supply Tokens?
Also known as rebase tokens, elastic supply tokens can be defined as assets whose supply fluctuates depending upon their price. The supply of these tokens is algorithmically adjusted through a process called rebase, thus suggesting the name of rebase tokens. These supply adjustments automatically occur to expand or contract the supply of tokens when the value of the token falls above or below the given target price.
These supply adjustments are designed to absorb volatility while aiming for a target price through a time-varying token supply, usually every 24-hour depending upon the Time Weighted Average Price (TWAP).
Let’s understand the concept of elastic tokens through an example. Let’s say you have 100 $ELST in your wallet at a given when each token is worth $5. In this case, if the value of tokens increases to $10, the supply adjustment will automatically contract the apply essentially leaving only 50 tokens in your wallet.
As you can see in the above example, the combined value of all tokens in your wallet stays the same ($500) even when the price of the token doubles in a short period of time. Thus, absorbing the price volatility.
However, it’s worth noting that your share of tokens in contrast with the total supply always stays the same. If you were holding 1% of the total supply of tokens before the rebase, you’d still be holding the same percentage of tokens against the total supply even when the number of coins in your wallet has changed. Essentially retaining your share of the network regardless of the price or supply.
Now, the question emerges – why do need such a concept? Why do we need an elastic supply token in the first place? Let’s find out.
Why Do We Need Elastic Supply Tokens?
Well, it’s a little tricky to understand the use-cases for elastic supply tokens. One might say, elastic supply tokens are quite similar in nature to that of stablecoins. However, there’s one major difference. Stablecoins, on one hand, aims to keep the price stable or pegged to another asset to facilitate the ease of trading.
Whereas, elastic supply tokens, on the other hand, aims for a given target price to fight the volatile nature of cryptocurrencies.
Examples of Elastic Supply Tokens and Underlying Risk
A few examples of elastic supply tokens are Ampleforth ($AMPL), YAM Finance ($YAM), BASE Protocol ($BASE), and DeFi 100 ($D100).
However, it is advisable to DYOR (Do Your Own Research) before investing in any experimental technology. Elastic supply tokens are still in an experimental phase and it might lead to a risky investment if you don’t truly understand the fundamentals and mechanism behind their working.