
Elastic Supply Token: How It Works and Its Benefits
1. Introduction to Tokens with Supply Adjustment Mechanism
Supply-adjusting tokens, also known as Elastic Supply Tokens, are cryptocurrencies capable of automatically changing their total supply based on market price fluctuations. The main goal of this mechanism is to maintain the token’s value close to a predetermined target price.
2. How Elastic Supply Tokens Work
2.1 Increasing Supply (Positive Rebase)
When the token’s market price exceeds the target price, the system automatically mints additional tokens, increasing the total supply. These new tokens are distributed evenly to all existing wallets in proportion to their current holdings. This helps bring the token price back toward the target.
2.2 Decreasing Supply (Negative Rebase)
Conversely, when the market price falls below the target, the system reduces the total supply by adjusting the number of tokens held in each wallet. Token balances shrink proportionally with the supply contraction, but investors’ ownership ratios remain the same. This helps increase the value of remaining tokens, pushing the price back up toward the target.
3. Advantages of Elastic Supply Tokens
-Price Stability: The supply adjustment mechanism helps keep the token’s value close to the target, reducing market volatility.
-Incentivizes Long-Term Holding: Although the token quantity in wallets may fluctuate, the ownership ratio stays constant, encouraging long-term holding.
-DeFi Applications: These tokens are suitable for decentralized finance use cases, where they can be used as collateral or a medium of exchange.
4. Risks of Investing in Elastic Supply Tokens
-High Price Volatility: Despite aiming for price stability, token prices can still be heavily influenced by investor sentiment and external factors.
-Complex Mechanism: The supply adjustment process may confuse unfamiliar investors, especially when wallet balances change without affecting total value.
-Not Ideal for Long-Term Investment: Due to the constant changes in token quantity and value, this type of token may not suit long-term investment strategies.
5. Notable Projects Using Elastic Supply Mechanisms
-Ampleforth (AMPL): One of the first projects to implement elastic supply, aiming to keep its token value close to 1 USD.
-sKLIMA: The token of KlimaDAO, using supply adjustment to support its mission of reducing carbon emissions.
-aUSDC and variableDebtUSDC: Tokens representing loans and debt within the Aave ecosystem, using elastic supply to reflect interest rates and market dynamics.