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HomeCryptocurrencyBitcoinThe Elastic Token: The Key Difference You Never Thought Of

The Elastic Token: The Key Difference You Never Thought Of

The elastic token (a.k.a rebase token), in some ways, is similar to stablecoins. One of the main similarities is that both aim to peg their price on an asset. But there is a key difference that separates the two. And that is their supply adjustment mechanism.

Image source: pexels

The Rebase Mechanism

Unlike stablecoins, elastic tokens adjust their circulating supply automatically through set algorithms to stay with their target price, hence the name. That up and down adjustment is called the rebase mechanism. 

Through the algorithms, the circulating supply adjusts to supply and demand accordingly without affecting the value of the users’ tokens. Therefore, the rebase token’s circulating supply is the one that moves, not its price. 

Through the rebase mechanism, the circulating supply adjusts by burning old tokens and minting new ones in circulation. Again, that adjustment aims to maintain the peg.

How Does It Work?

The Rocket smart contract adjusts the total quantity of tokens proportionally across all wallets every 24 hours to return the price to the launch peg of 1.25. This means that if the price is over the peg every 24 hours, everyone who has Rocket will receive additional tokens, driving the price closer to the peg.

Usually, this results in compounding profits for holders as the price continues its upward momentum following a rebase. The price may return to the peg, but you accumulate more and more tokens just for holding Rocket. And you do not have to do anything to claim these tokens because it is automatic and instant. 

In most crypto platforms, users can see a countdown until the following daily rebase. The current market price and current peg are displayed at the same time every day. If the price is higher than the peg, everyone who has Rocket receives extra tokens at the rebase time. You can also view what happened during the most recent rebase and the total supply of rocket tokens in circulation, which might grow and shrink over time.

Elaborating Supply Adjustments in the Rebase Mechanism

The expansion and contraction of supply affect all its users. From its users’ point of view, their tokens increase and decrease in their wallets. To reiterate, if the token’s price exceeds the peg, the circulating supply expands during rebase, which increases the user’s token. And pumping up supply will result in lower demand, thus a lower value of each. On the other hand, if the token’s price goes below the target price, the circulating supply contracts, meaning the user’s token decreases. Decreasing supply will result in higher demand, and thus the value of each increase.

Image source: pexels

Let’s have another example to elaborate on this concept. Let us say the Rocket Defi (ROCK) exceeds the target price; from 1 ROCK equals $1, it is now 1 ROCK equals $2. During the rebased period, the ROCK supply will inflate to keep the price at $1. Inflate means the ROCK supply increases, and the demand decreases. It must happen because if the demand is low, the value of each token decreases. And the mechanism wants this to keep the value of ROCK at the target price, 1$. With that, the $1 is now just equivalent to 0.5 ROCK compared to $1 worth 1 ROCK before. Note that even though it is now 0.5 ROCK, it is still worth 1$. In other words, John’s 1 ROCK should decrease to 0.5 to keep 1 ROCK equals $1 true, adjusting to 1 ROCK equals $2 price movement.

Are Elastic Tokens Popular?

Rebase tokens are still a relatively new subcategory of cryptocurrencies that isn’t that well-known. The total market cap of rebase tokens right now is about $601 million, less than 1% of the total capitalisation of the cryptocurrency market. Thus, rebase tokens are just a small fraction of the crypto sector right now — but there is room to grow.

Still, brokers and exchanges like Coinbase, Kraken, or Bitcoin Profit are gradually adding them to their listings, starting with the more popular ones. For now, the main tokens in this category include Olympus, YAM Finance, Ampleforth, BASE Protocol, and DeFi 100. Those are the ones you’re more likely to encounter in crypto brokers’ offerings.

What If the Token Goes Below the Target Price? 

For example, if the price is more than 10% below the peg for a full day, the supply of tokens contracts at rebase time. A negative rebase is the term for this. This means that the amount of money in each wallet will get lowered. However, take in mind that your token stack’s percentage share does not change. If you start with 1% of the token supply, you will end up with 1% of the token supply. And the rebase actually pushes the price closer to the peg, lowering the risk of a negative rebase the next day.

Closing Thoughts

The key difference between elastic tokens from stablecoins is their supply adjustment mechanism. The supply adjusts according to price fluctuations to keep up with the pegged asset. A rebase token’s supply can be highly fluctuating, but its price tends to stay consistent depending on whatever asset’s price it is pegged. Investing in any of these cryptos, notwithstanding their technical differences, demands extensive research before getting started.

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