What Are Elastic Supply Tokens?
When choosing crypto assets to diversify their portfolio, traders primarily rely on such key indicators as market capitalization, price chart, as well as maximum and circulating supply. Earlier, it was customary to divide all cryptocurrencies into two camps — with a fixed and an unlimited supply. For example, Bitcoin has a fixed maximum supply of 21 million coins, which makes the first cryptocurrency resistant to inflation. And Ethereum has an unlimited maximum supply, but only a certain number of coins can be mined in a set period.
But, with the development of decentralized finance, unique projects that have a dynamic (elastic) supply flooded the market. Elastic supply tokens are not like other cryptocurrencies, but rather have some similarities with stablecoins. Both types of assets strive to achieve the target price. But if stablecoins have a fixed amount that is backed by a fiat reserve, then elastic tokens tend to the target price with a dynamically changing supply. In addition, the price of an elastic token can be aimed at reaching the price of another crypto asset or a fiat currency, and in some cases to the price of the whole crypto market cap.
How Do Elastic Tokens Work?
Tokens with a dynamic or in other words elastic supply use a rebase mechanism in order to increase or decrease the supply. In simple words, we have an elastic token “Coin” that aims for a target price of $1. At some point, the demand for the coin increased and pushed the price higher by 20%, that is, the price of the “Coin” is now $1.2. In this case, the rebase mechanism will be forced to issue more tokens (increase the supply) in order to lower the price back to $1. In the opposite case, when the price of the “Coin” falls below $1, the rebase mechanism, on the contrary, will reduce the supply, thereby increasing the price of the “Coin” to $1. It is worth noting that the rebase mechanism can be set up with different frequencies and conditions.
Top 5 Elastic Tokens
Ampleforth is one of the most famous representatives of elastic tokens. The cryptocurrency utilizes the Ethereum blockchain, therefore AMPL is an ERC20 token. The target price of AMPL is $1. Unlike traditional stablecoins, the price of which tends to always be, for example, $1, the AMPL price can float freely in a given price range. The rebase mechanism is launched daily, so the protocol issues more tokens if the price threshold of $1.06 has been broken and reduces the offer if the price has fallen below $0.96. It is worth adding that the balance of Ampleforth wallets changes automatically after each rebases.
Base Protocol is a unique asset that is a kind of crypto market index. The BASE price is pegged to the total market capitalization of all cryptocurrencies in the ratio of 1:1 trillion. For example, at the time of writing, the total market capitalization of all cryptocurrencies is $1,947,287,791,346, and the price of one BASE token is $1.95. To support the pegging, the developers have implemented a rebase mechanism. The mission of Base Protocol is simple — to make it so that everyone can easily benefit from the performance of the entire cryptocurrency market in a secure, decentralized, and future-oriented way.
Origin Dollar is a coin with a target price of $1 with an elastic supply. Origin is located on the Ethereum blockchain and is an ERC20 token. This is a stablecoin that is the best substitute for the dollar, that is, it allows you to send fast international payments and also reduces the fees that are usually imposed by traditional financial services. But the most interesting thing is that Origin Dollar allows you to increase your capital without making any effort. The user simply buys OUSD, stores it on one of the non-custodial Ethereum wallets, and receives 14.18% APY from DeFi yields protocols (Curve, Aave, Compound, and others) — no staking or lock-ups. The OUSD price is based on three stablecoins: USDT, USDC, and DAI.
Olympus is a decentralized reserve cryptocurrency that aims to become the best replacement for stablecoins. So the price of a fiat currency depends on the state issuing it and can depreciate simultaneously the stablecoins pegged to this currency are also depreciated. In the case of Olympus, its price is algorithmically supported by a reserve of DAI tokens and other cryptocurrencies. Olympus differs from the elastic tokens listed earlier in that the rebasing mechanism will react only if the OHM price falls below $1 — the protocol buys and burns tokens to boost the price back to the target mark. But the important point is that while backed by $1 Olympus is not pegged to it. Thus, the price of the token can grow above $1, since the protocol does not impose a limit. A cryptocurrency similar to Olympus is its fork Wonderland.
Frax is the first stable cryptocurrency on the market that disposes of two models simultaneously — collateralized and algorithmic. Frax’s target price of $1 is supported by an elastic supply. The amount of collateral depends on the current FRAX price — if the price is less than $1, the protocol increases the collateral ratio in steps of .25%, and vice versa if the price is higher than $1, the protocol lowers the collateral ratio by one step. The interesting point is that the users themselves can control the Frax protocol — everyone can request to refresh the collateral ratio. This approach allows Frax to remain more decentralized and capital-efficient than fiat-backed stablecoins and more stable and reliable than algorithmic stablecoins.
Tokens with an elastic supply are a new stage in the development of decentralized finance. But this idea is still in its infancy. Moreover, most of these tokens are one-day projects and only some of them are really worthwhile. So, elastic tokens very often encounter errors in the program code and smart contracts, as happened with the early popular Yam Finance. In addition, note that elastic tokens are speculative assets: you can both earn good money and lose your funds in a moment. So, before investing in such projects, carefully study the built-in mechanism and all its subtleties, and pay attention to the project developers — because sometimes there are malicious actors who aim to profit from you.