Understanding Elastic Supply Tokens

Introduction

This blog discusses elastic supply tokens, their need, and how they operate.

What is a Rebase token?

A rebase, or elastic supply token algorithmically changes the total supply of circulating tokens to maintain a fixed token price. The change in the supply is achieved by a rebase mechanism where existing tokens are burned or new tokens are minted according to the behavior of the token’s price.

Popular rebase protocols include Ampleforth, Base Protocol, Yam Finance, and Defi 100.

How do they work?

If the price of a rebase token increases more than its set price, the protocol automatically mints new tokens to pull the price down to its original state. As a result, each individual with such tokens in their wallet will have a higher number of tokens, each with the set price.

Inversely, if the price of the rebase token falls below the set price limit, the rebase protocol burns existing tokens in circulation to affect the scarcity of the tokens in the market. In this case, the number of tokens in each wallet would decrease.

In both cases, after the rebase event, the price of an individual token and the overall value of the tokens in each wallet remains the same. A positive or negative rebase incentivizes traders to sell or buy their tokens. This phenomenon is what helps rebase tokens maintain their set price.

Rebasing usually occurs every 24 hours, depending on the Time-Weighted-Average-Price (TWAP).

Need for Rebase tokens

The primary need for rebase tokens is their nature to maintain a fixed and stable value. It is similar to the concept of stablecoins in its desire to have an involatile price. However, there is a significant difference between the two.

Difference between Rebase tokens and Stablecoins

Stablecoins maintain the price of the tokens stable by pegging the price of the tokens to another asset of a less volatile nature. On the other hand, Rebase tokens maintain a stable value by algorithmically changing the total supply of the circulating tokens in the market according to their behavior.

Risks of Elastic Supply tokens

Elastic supply tokens are a high-risk, high-reward game. In case of a negative rebasing, the users are left with lesser tokens than before the rebase event. It is crucial to properly understand the mechanisms of rebasing protocols before investing in one.

Conclusion

Though elastic supply tokens are relatively new in the world of decentralized finance, they have gained extreme popularity in recent years. Will the bubble burst, or will it act as an alternative to stablecoins? Only time will tell.