We are familiar with Bitcoin (BTC) that has a 21 million token supply. There are tokens with an infinite supply like Ethereum (ETH). Some governance token has fewer like Yearn.Finance (YFI) with a total of 36,666 tokens.
The number is determined based on the type of projects and the functions of the token. Then, there is the elastic supply token.
A token with an elastic supply protocol means the token will not have a fixed number of supplies. The supply will readjust through an event called rebase.
Through rebasing, the token supply can increase or decrease based on the token target price or other deciding factors.
For example, this is just one possible way how an elastic supply token works.
You have a $1 target price token called ABC. ABC will rebase if the price experienced a 20% increased or decrease.
When there is a 20% increased, ABC will be valued at $1.20. If you hold 100 ABC, the value will be $120. Due to that, the rebase will increase the token supply by 20%, and the token price will return to $1. Additionally, you will now have 120 ABC tokens.
When there is a 20% decreased, ABC will be valued at $0.80. If you hold 100 ABC, the value will be $80. Due to that, the rebase will decrease the token supply by 20%, and the price will return to $1. You will now have 80 ABC Tokens. Moreover, if the price keeps on plunging, the compound loss will be inevitable, leaving you with lesser tokens and loss in capital.
Projects with elastic supply token
There are several projects with elastic supply tokens. However, not all survived, either due to regulations or flaws in the project itself. Some notable projects are:
- Ampleforth (AMPL)
- BASE Protocol (BASE)
- Yam Finance (YAM)
- DEFI 100 (D100)
Everything looks good if things went up but not really in a bear market. What’s more important is the main driven factor, market demand. Without a strong market demand, such protocol will only dig its own grave sooner or later.
It is always important to understand a project before participating. Do your own research and invest the money that you can lose not the money that brings food to the table.