We will talk about supply tokens that are called "elastic". We talk about these tokens when the supply in circulation is changing and evolving. Instead of price volatility, what will change, in fact, is the supply of tokens that we will rebalance via events called "rebases".
To give you a rough idea, imagine that the Bitcoin protocol does rebases. This would mean that Bitcoin would adjust the amount of bitcoin in users' wallets to reach a certain price. What if you have 1 BTC today and tomorrow, after a mild night, you wake up with 2 BTC because 1 BTC has reduced its value by half. It can also be the opposite (you end up with 0,5 BTC). This is what we call a "rebase".
Why are rebases interesting in DeFi?
Rebases and elastic tokens are very new in the world of DeFi. The mechanism behind it allows for many great experiments.
An elastic supply token works so that the circulating supply expands or contracts based on changes in the price of the token. When the rebasing function occurs, then the supply of the token can be increased or decreased algorithmically, depending on the price, therefore.
From a practical point of view, this can be very destabilizing. The quantity of tokens in the wallet may therefore change after a rebase.
The main idea to remember is that your holdings are proportional to the total supply and this does not change with the rebasing. If you had say 1% of the supply before the rebase, you will still have 1% of the supply after the rebase. In the end, you keep your share of the network, whatever the price of the token.
It's relatively close to the system with liquidity providers, indeed.
To give you some examples, one of the best known elastic tokens is AmpleForth. It was the first in this sense let's say it. Ampleforth is an unsecured synthetic asset, where 1 AMPL targets a price of 1 USD. Rebases occur once every 24 hours.
The known one was not successful at first and it took a big liquidity mining campaign "Geyser" for it to gain popularity. So over a 10 year period, users earn over a 10 year period.
AMPL price is targeting $1, but it can still be quite volatile, as can be seen in its chart.
The risks of elastic supply tokens
In fact, let it be said. These can be very risky investments. It's dangerous, especially if you don't know how it works. You should only invest in this type of token if you know what you are getting into. And casually, this does not prevent the price from being volatile (like Ampleforth). Likewise, looking at the charts won't do you much good because after rebases, the number of tokens you hold will change.
In fact, this can amplify your gains upwards but the opposite is also possible! Yes, if the price of the token is falling, then you lose money (because the token loses value) but also because you have fewer tokens after each rebase.
Keep this in mind. It's a very complex operation.
We are still exploring this type of operation. It's new and above all we have no perspective.
What we do know is that rebases and elastic tokens will certainly evolve. We will certainly see new and improved protocols.
The idea is germinating, that's all we can tell you for the moment and it might be hot 😉
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Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
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