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A Different Look at Stablecoins: Elastic Supply Tokens
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Decentralized finance has brought new types of blockchain-based financial products into the cryptocurrency space. One such innovation in creating new asset classes is so-called “Elastic Supply Tokens” (EST), which will be discussed in today’s article.
Elastic Coin Supply
The elasticity of supply is defined as a measure that reflects a change in supply when a related parameter, such as price, changes. That said, the more users respond to price fluctuations, the more elastic the coins’ supply is.
Tokens are elastic in terms of price if the total supply of these tokens is not fixed but is adjusted on a regular basis. As the price of token changes, the total supply of coins expands or contracts. This process is called “rebasing” and occurs algorithmically depending on the current price of each token.
To some extent, tokens that rebase are similar to stablecoins – both types of assets seek to match the target price, but in different ways. Stablecoins are based on a fixed exchange rate principle, which correlates to a selected asset that can retain value. Thus, stablecoins are pegged to (e.g.) the US Dollar at a 1:1 ratio and retain their value relative to USD.
Unlike stablecoins, ESTs aim for a target price with a time-varying supply of coins. Through a process of supply adjustment (the rebase), the circulation of tokens is regulated. So, for example, if the price of a token is meant to be $1 but suddenly changes, the current supply of all those tokens will change accordingly. If the price of one such token falls below $1, the current supply of coins will decrease, the value of each token will rise, and vice versa. It is worth noting that adjustments can be performed with different frequencies and conditions.
The rebase itself is a potentially profitable event. However, it is worth remembering that when investing in tokens with an elastic price, the risks of losing funds also increase. Elastic supply tokens have appeared in the DeFi ecosystem relatively recently. Still, there is already a decent number of independent projects in the field of creating such asset classes on the market, some of which will be described below.
The first algorithmic-adjustable assets were proposed in 2017 by the Basis project, which sought to create tokens free from volatility.
The Basis protocol offered a stable currency model consisting of three tokens:
- The system’s main token, Basis, pegged to the dollar. It was meant to be exchanged, and its supply was elastic to maintain its peg to USD;
- Bond tokens were meant to be auctioned off when the supply of coins increased. Their price was always lower than 1 Basis, which made it possible to expect profits when purchasing such tokens;
- Equity tokens. The supply of these tokens was fixed, and the price was not tied to anything. These coins were intended to generate income as dividends.
Basis raised $133 million in a private placement in 2018. Despite increased interest from large capitals, the project was shut down by the Securities and Exchange Commission as the company’s tokens were defined as securities.
The Ampleforth project issued its own algorithmic AMPL token on the Ethereum blockchain. But while Basis offered bond tokens to increase the supply of tokens, Ampleforth introduced the concept of rebase, a mechanism for the protocol to issue tokens when a given threshold is exceeded. In other words, if the AMPL price exceeds the target price, the protocol triggers the token issuance process. It’s worth mentioning that the number of tokens per user’s wallet changes automatically after each rebase process.
The protocol uses Chainlink as an oracle to determine the AMPL rate, while the rebase mechanism is activated daily. The approach implemented by Ampleforth reduces the impact on token correlation with outside assets.
AMPL and similar tokens cannot be categorized as stablecoins because the latter are linked to other assets through price and are designed to completely eliminate volatility, while AMPL aims to have lower volatility rather than eliminate it. The Ampleforth project is the largest and most popular project using elastic supply tokens in the DeFi ecosystem. The AMPL token is available on decentralized platforms, such as Uniswap, Balancer, and Sushiswap, to provide liquidity to certain pairs as part of the Geysers campaign, which gives users the opportunity to claim AMPL “rewards.”
YAM is an elastic supply token that functions similarly to the Ampleforth Model (AMPL). Notably, 10% of each rebase process is used to buy yCRV, the LP tokens in the Curve and Yearn pool for the community-managed Yam fund.
As mentioned above, tokens with elastic supply tend to have a target price; so for YAM, the target price is $1 and the period between rebases equals 12 hours. The Yam token has been distributed through yield farming and providing liquidity to Yam pool participants. The main property of YAM is the right to update the functionality of the YAM protocol: rebasing, YAM fund, or oracles.
In August 2020, a bug was discovered that made YAM and its $750,000 yCRV fund unmanageable and immutable; hence there is no way to place YAM in liquidity pools on decentralized exchanges safely. The YAM token will exist as long as Ethereum maintains a corresponding contract.
Currently, the new Yam 3.0 protocol has one liquidity pool with a YAM/yUSD pair. YAM was one of the first projects to offer a high-yield farming model.
OUSD – Origin Dollar
OUSD is designed as an improved stablecoin for the Ethereum network, and its pricing is based on three other stablecoins: USDT, USDC, and DAI. Origin Dollar provides returns through the deployment of underlying assets, and an elastic supply allows OUSD holders to accrue tokens as rewards.
OUSD developers are working to implement the process of lending stablecoins by integrating into Compound, Aave, and dYdX protocols. It’s also worth noting that OUSD is one of the payment methods on the Dshop platform.
The algorithmic stablecoin Mithril Cash is a fork of the Basis Cash protocol and consists of three tokens:
- Mithril Cash (MIC), a token with a target price of $1, intended to be used as a medium of exchange and tied to the MakerDAO Multi-Collateral USDT token;
- Mithril Share (MIS) – a platform management token;
- Mithril Bond (MIB) – a redemption token for Mithril Cash holders when MIC drops below $1.
The MIS and MIB tokens are intended to raise the MIC price to $1.
MIC tokens are currently being distributed by depositing over 16 different tokens and stablecoins, after which we will see the start of the distribution of MIS tokens to the SushiSwap MIC-USDT liquidity providers.
Empty Set Dollar
ESD is an algorithmic supply-elastic stablecoin whose freshly minted tokens are used as an incentive to maintain the peg.
The developers introduced the concept of “coupons,” which can be obtained by burning ESDs and selling the same tokens at a discount. The coupons can be claimed in future ESD releases when the price of the latter reaches above $1.
Unlike other rebaseable tokens, in the case of ESD, rebasing is voluntary; in other words, if users decide to link their ESD tokens or block the liquidity, they will receive a newly created ESD if the rebase process is positive.
Base Protocol (BASE) is a synthetic crypto-asset whose price is based on the total market capitalization of all cryptocurrencies at a ratio of 1:1 trillion. BASE is needed to maintain the market rate, which is pegged to its underlying asset, the crypto industry. The token’s peg to market capitalization is kept stable by means of an elastic supply protocol.
Users can get BASE tokens in Uniswap liquidity pools, and the Base Cascade campaign allows them to get rewards for locking their tokens in liquidity pools.
The protocol provides universal trading tools that allow users to speculate on the entire cryptocurrency market simultaneously, not just individual assets. Base Protocol can be used as a credit instrument for leveraged hedging.
Elastic supply tokens are an innovation in the sense that they provide an opportunity to look at the structure of stablecoins from a different angle. The mechanism of variable coin supply to provide a link to an underlying asset with less volatility opens a plethora of use cases for stable tokens.
It should not be forgotten that Elastic supply tokens are experimental assets that may have critical errors in their smart contract code, and some projects have anonymous founders behind them. In any case, Elastic supply tokens are being developed intensively and are attracting more and more attention from crypto enthusiasts and developers. For example, according to Coingecko portal, the total capitalization of rebase tokens is almost $344 million, $302 of which comes from Ampleforth.
Disclaimer: The contents of this article are not intended to be financial advice and should not be treated as such. 3commas and its authors do not take any responsibility for your profits or losses after you read this article. The article has been presented to provide readers with general information. There is only personal experience described herein. The user must do their own independent research to make informed decisions regarding their crypto investments.