The development of technology has pushed people to create new ways to improve the financial industry. An example of this is a cryptocurrency and its Decentralized Finance, or DeFi for short. This is an emerging technology that aims to remove any third parties in financial transactions. Moreover, it is also a place wherein multiple crypto assets will be used to exchange for a product or service. As of now, it holds a lot of cryptocurrencies and hosts new releases of financial products in its blockchain. One of the new ones is called elastic supply token crypto.
Know more about it and how it works right here at Cryptoshimbun!
What is an elastic supply token?
An elastic token, also known as rebase coins, is a cryptocurrency that constantly changes its supply as a means to maintain its price. This means that it’s an asset where its supply relies on the changes in the token’s price. With the use of smart contracts, the supply is adjusted by doing a process called ‘rebase’.
Rebase, or supply adjustments, happen when the value of the tokens is higher or lower than the target price. Moreover, the relationship between the token value and supply is directly proportional. This means that the supply expands when the value is higher than the target price while the supply contracts or burns when the value lowers.
Aside from this, elastic supply tokens hold similarities with stablecoins. The latter achieves its price stability through collateralization. This type of cryptocurrency pegs its market value to an external reference, which can be a fiat currency or a commodity. Meanwhile, elastic supply tokens have a similar premise, but the difference lies in the rebasing process.
In a nutshell, the elastic supply token shines because of its highly volatile nature. Despite that, the rebasing process is what makes its price steady, which typically happens after 24 hours or depending on the Time-Weighted-Average-Price (TWAP).
How does the rebasing process work?
In a situational example, you have 10 elastic supply tokens and the target value of each token is set at $1. When its price increases to $2, the supply of the tokens will increase and give you more tokens in your wallet. But when this happens, the value of each token will decrease. As a result, the increase in supply will make the demand lower, which in turn lowers the price back to its target value.
On the other hand, when the token’s value is lower than the target price, the supply will contract, making each token worth more. Overall, this rebasing process accommodates the elastic token’s volatile nature.
Examples of elastic tokens
Now that you know the nature of elastic tokens, take the time to know the high-ranking tokens in this category. Below is a list for your reference:
The Ampleforth Protocol runs on the Ethereum blockchain and strives to reward its users with a crypto asset equal to the US dollar. This cryptocurrency introduces the rebasing system, which involves adjusting the supply every time there is a change in price value. Consequently, this makes Ampleforth elastic and non-dilutive, which means that users retain the same proportion of the overall supply.
The token of Ampleforth is known as AMPL, and its value is monitored daily to make sure it remains equal to the US dollar. After 24 hours, the value and supply of AMPL will change and can exist in the following states:
- Expansion – AMPL value is greater than $1, which means new tokens need to be added to the AMPL economy
- Contraction – When the AMPL value is less than $1, there is now a need to remove tokens in the economy.
- Equilibrium – When the value of 1 AMPL is $1, the AMPL reaches equilibrium.
- Yam Finance
Another cryptocurrency that exists in the Ethereum blockchain is the Yam Protocol. This strives to reward its users by providing them with a crypto asset called YAM. This token mirrors the price of the US dollar and also uses the rebasing process to accommodate its volatility.
This crypto is created out of a patchwork of codes from DeFi projects. At the launch of Yam Protocol, all users of the system locked up different cryptocurrencies, which is how they earned YAM tokens.
Moreover, the premise of Yam Protocol helped to raise the popularity of decentralized finance (DeFi).
- Base Protocol
A decentralized financial application known as Base Protocol runs on the Ethereum blockchain. It also uses an oracle service called Chainlink, which is part of its data feed. Its native cryptocurrency is the BASE token in which its price is pegged to the whole cryptocurrency market cap. As such, its value has a ratio of 1:1 trillion, which lets you speculate on the crypto market’s value with just one token. Just like YAM and AMPL, this token also uses the rebasing process.
Do people need elastic supply tokens?
The nature of elastic supply tokens strives to diminish the volatile nature of cryptocurrencies. Having a varying supply count is a way for tokens to have a stable price. As such, the main purpose of these tokens is to make sure that the value remains the same.
The risks of elastic supply tokens
While the premise of elastic supply tokens is great, it is still in its experimental phase. This means that there is little data available for people to delve into. The lack of information about elastic supply tokens can be a great risk for investors since they only have little data to base their decisions on.
Should you invest in elastic tokens?
The answer to this question depends on how much you are willing to dabble with its risks. If you are comfortable trying something new, then you should invest in elastic tokens and see how everything will go.