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Elastic supply tokens: What are they and how do they work?

Elastic supply tokens: What are they and how do they work?

Elastic supply tokens: What are they and how do they work?

Thu Jun 23 2022 07:47:00 GMT+0000 (Coordinated Universal Time)

Since 2010, the advancement of cryptocurrency has been highly trajected in the field of finance with the use of technology. Starting with blockchain technology, the world of crypto has further expanded by establishing Decentralised Finance or DeFi, for short. This form of technology further explains the difference between crypto vs banks and other financial institutions. With DeFi, there are no extra fees per transaction since users within the network can directly trade with others through its peer-to-peer financial networks. 

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The development of DeFi has further unlocked a lot of possibilities in crypto, and the perfect example of this is crypto gambling. This form of entertainment has granted convenience, security and anonymity to its users, which attracted more people to invest in cryptocurrency. 

As the number of coins and tokens continues to grow, the focus of attention is now on the emergence of the elastic supply tokens. Continue reading this article to find out if these are worth investing in and if you can use them for crypto gambling.

What are elastic supply tokens?

Elastic supply tokens are digital assets that change their supply as a way to maintain their ideal price. The number of elastic supply tokens changes daily and you can see them expanding or contracting. This phenomenon is commonly referred to as rebasing, which happens when tokens have a value higher or lower than the target price. As a result, the supply needs to lessen or increase just to keep it close or equal to the target price. 

So, what is a rebase token? The answer to this is it's just another name for elastic tokens, which makes the two of them the same thing. The reason why it has this alternate name is because of rebasing, and you’ll find out how it works in the following sections.

How does rebasing work?

Before delving further into how elastic tokens work, you must first understand a few terms and concepts in economics to help you understand its basis.

In economics, elasticity refers to a variable’s sensitivity to changes with another. The most common analogy for this is the relationship between supply, demand and price. When the supply is high, it enters surplus or excess items. This is the reason why sales or discounts occur so that the number of goods will abruptly decrease to reach equilibrium. Meanwhile, the prices increase when there is a shortage of goods. 

This elasticity goes hand in hand with rebasing since the latter tackles the idea of setting a new base level for a price. When the price increases or decreases, the supply of coins will change to maintain the equilibrium or target price. 

This is just the main idea of rebasing, but to further explain, here is an example for you:

You happen to have 10 ABC coins that are worth $1 each, which is also its target price. One day, the value of the ABC coin went up to $2, which caused its supply to expand or increase in number. Consequently, your wallet contains more ABC coins, but the value of each has reduced. Additionally, this sudden decrease in value will also diminish the demand for ABC coins.

If, on the other hand, the price of ABC coin went below its target price of $1, the supply of coins will contract or decrease in number. As such, the ABC coins in your wallet will also decline, but the value of each coin will escalate. 

This example explains the volatile nature of elastic supply tokens, which shows that it needs rebasing just to maintain its target price steady in the market. 

Elastic supply tokens vs stablecoins

On a different perspective, elastic supply tokens are similar to stablecoins in terms of price stability. While the former uses rebasing to maintain the target price, the latter pegs its market value to an external reference. Moreover, stablecoins use collateralisation to maintain their volatility, which is why it attaches itself to fiat currencies, commodities or other financial instruments. 

The role of volatility in cryptocurrency

Both elastic supply tokens and stablecoins are related due to volatility, but what is this factor in the first place? In simple terms, volatility is the measurement of the rise and fall of a crypto asset stock over time. Investors use this factor as a means to determine the risks of investing in an asset. 

An example of volatility is the sudden rise or drop in the value of Bitcoin as well as other digital currencies. This has caused a stir in the crypto world because a lot of people suffered great losses, which further scared away new investors. With that said, the creation of stablecoin is to minimise or eliminate volatility. By pegging itself to an external financial instrument, the market value of stablecoins will remain stagnant. The same logic applies to the concept of rebasing in elastic supply tokens.

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Top elastic supply tokens

To give you more background on the whole concept of rebasing, here is a list of elastic supply tokens: 

  1. Ampleforth

Running on the Ethereum blockchain, Ampleforth is a cryptocurrency used to incentivise a network of users who maintain a crypto asset equivalent to one US Dollar. Its native coin is known as the AMPL, which falls under the elastic supply tokens category due to its rebasing system. 

The interesting thing about Ampleforth’s rebasing system is that it occurs every 24 hours. Moreover, the supply of the coin is based on the changes in its price. Since its goal is to match one US Dollar, it has a target price of $1. The rebasing system of Ampleforth has three states, which are the following:

  • Expansion - When the price of AMPL is greater than its target price of $1, new tokens will be added to the AMPL economy. 
  • Contraction - Conversely, an AMPL price worth lower than $1 will push its economy to remove tokens. 
  • Equilibrium - This means that the token’s price is equivalent to $1.
  1. Yam Finance

Yam Finance was a project in DeFi, which was inspired by the rebasing system of Ampleforth as well as the distribution system of Yearn Finance. In August 2020, the Yam Finance Protocol was released with a total supply of 5,000,000 YAM, the native token of Yam Finance. Moreover, it has a rebase period of 12 hours, which starts at 8 AM and ends at 8 PM Universal Time Coordinated (UTC). 

24 hours after its release, Yam Finance garnered a total of $580 million in crypto assets, which made it more popular in the market. However, it also crashed hard on the same day due to a bug error present in the rebasing system. While this was happening, the founders did their best to fix the bug error before the next rebasing but failed. Its short-lived fame made the market price of YAM reach $160 but plummeted to $1 in just 2 hours.

  1. Base Protocol

Under elastic supply tokens, Base Protocol started as an asset that crypto enthusiasts can use to navigate throughout the entire cryptocurrency industry. Holding ownership of its native tokens, BASE, you have access to track the crypto market. As such, you get to monitor the performance of the entire market without paying entry fees.

The reason why the Base Protocol has an all-access pass is that its price is pegged to the whole cryptocurrency market cap. With a ratio of 1:1 trillion, you have the opportunity to gamble the market’s value by using one BASE token. Additionally, this also uses rebasing to keep its supply, demand and price at equilibrium.

  1. Mithril Cash

Another elastic supply token you should look into is Mithril Cash. It has three native tokens known as Mithril Cash (MIC), Mithril Share (MIS) and Mithril Bond (MIB). The target price of Mithril Cash is set at $1 and it follows a rebasing protocol to maintain that value. Besides that, the Mithril Share token is the backbone of the system since it provides resources and guidance to the protocol. Those who have this token will receive a new money supply that enters the Mithril Cash System. Additionally, the Mithril Bond token works hand in hand with the MIC token in terms of guiding the MIC price to remain at $1.

With that said, the Mithril Cash rebasing system has two phases to maintain the price of tokens, namely:

Expansionary Phase

When the price of Mithril Cash exceeds $1, the supply of the MIC token will increase. During this phase, MIC token holders will have the chance to redeem Mithril Bonds at 1:1. If the value of Mithril Cash token stays at $1.01, more tokens will be minted and distributed to the Mithril Share token holders. 

Contractionary Phase

Meanwhile, the supply of the MIC token will decrease when its price drops below $1. During this phase, you can buy Mithril Bonds using your Mithril Cash for a discounted price. This, in turn, removes the MIC token from circulation and guides its price value to return to $1.

The risks of elastic supply tokens

Now that you know the general concept of elastic supply tokens, it is time to learn its risks. The following section will help you understand if this form of crypto is worth investing in.

  1. Elastic supply tokens are high risks and dangerous investments

While the idea of controlling volatility is great, you cannot overlook the high risk of elastic supply tokens. Based on what happened with Yam Finance, it is possible to encounter bug problems that will ruin the whole rebasing system. On that matter, the YAM token’s value has dropped significantly to the point where people are discouraged with the whole idea of elastic supply tokens.

Given its high risk, elastic supply tokens are not for beginner crypto investors. Simply looking at market charts will do you no good since the number of coins you have will change after a day or several hours. Despite that, you should only invest in elastic supply tokens when you have a full grasp of its mechanism to make sure you know what you’re doing.

  1. You gain assets but still lose money due to rebasing

The presence of rebasing means the value of your elastic supply tokens will never stay the same. An example of this is a certain coin's price drops the following day after buying it for $10. This scenario puts you at risk of losing more than you invested.

  1. Elastic supply tokens are still experimental at this poin

Unfortunately, there are still not enough studies or certified articles on elastic supply tokens since it is still at an experimental stage. This even makes it hard for you to get to know more about its nature due to the limit of resources. As such, it would be difficult for people to invest in something they do not have full confidence in.

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Elastic supply tokens and their implications in crypto gambling

As of now, it is safe to say that elastic supply tokens cannot be used for crypto gambling yet. Given its volatile nature, it would be hard to persuade people to investing in these tokens due to their uncertainty and limited knowledge of the subject. Currently, there are no crypto gambling sites that endorse elastic supply tokens yet. 

The future of elastic supply tokens

With everything considered, nobody knows the trajectory of elastic supply tokens in the future. However, the silver lining above all its risks and failures is that there is still room for improvement. On the bright side, you can learn more about various crypto investment tips and other crypto-related topics at Bitcasino! At the same time, you'll find thousands of casino games you can play in Bitcasino. Choose from slots, live dealers, table games and more. Doing this will help you know why crypto gambling is the best.

Words by: Leira Lacuata

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Elastic supply tokens: What are they and how do they work?