Clear DefinitionsElastic Supply Mechanism
2 min read
Pronunciation
[i-las-tik suh-plahy mek-uh-niz-uhm]
Analogy
Imagine everyone in a small town holds special 'town dollars' that are supposed to always be worth $1. If the town dollars start trading for $1.10 in the market, the 'elastic supply mechanism' automatically gives everyone 10% more town dollars (their balance increases). This increases the total supply to hopefully bring the price back down towards $1. Conversely, if they trade at $0.90, everyone's token balance might be reduced by 10% to decrease supply and push the price back up. Your number of tokens changes, but your share of the town's money pie stays the same.
Definition
An elastic supply mechanism, often used for "rebase tokens" or some types of algorithmic stablecoins, is a protocol feature where a cryptocurrency's total supply automatically adjusts (increases or decreases) based on predefined conditions, typically aiming to maintain a target price. These adjustments are applied proportionally to all token holders, meaning their percentage of the total supply remains the same even as their raw token balance changes.
Key Points Intro
This mechanism programmatically alters a token's total supply to influence its market price, usually targeting a specific peg.
Key Points
Automatic Supply Adjustments (Rebases): Total token supply changes algorithmically based on price deviation from a target.
Targets Price Stability (Usually): Aims to keep the token's price pegged to a specific value (e.g., $1 USD or another asset).
Proportional to Holdings: Supply changes affect all token holders' balances proportionally; their share of the total supply remains constant.
Token Balance Fluctuates: Unlike standard tokens, the quantity of tokens in a user's wallet can change automatically.
Example
Ampleforth (AMPL) is a well-known cryptocurrency with an elastic supply mechanism. Its protocol targets a price of approximately $1 (specifically, the 2019 CPI-adjusted USD). If AMPL's market price (e.g., the 24-hour volume-weighted average price) is above the target, the total supply increases (a positive rebase), and all wallet balances increase by the same percentage. If the price is below the target, the supply decreases (a negative rebase), and wallet balances decrease proportionally.
Technical Deep Dive
Elastic supply mechanisms are implemented via smart contracts. The contract typically includes a `rebase()` function that is called periodically (e.g., daily). This function reads the current market price of the token from an oracle and compares it to the target price.
- If `CurrentPrice > TargetPrice + Threshold`, a supply expansion occurs. The contract calculates the required percentage increase and applies it to an internal scalar that affects all balances, or directly updates balances.
- If `CurrentPrice TargetPrice - Threshold`, a supply contraction occurs similarly.
The key is that an individual's balance `b_new = b_old * (totalSupply_new / totalSupply_old)`. This ensures their percentage ownership doesn't change due to the rebase itself.
Security Warning
Elastic supply tokens (rebase tokens) can be extremely volatile and behave counter-intuitively for many users due to changing wallet balances. The stability of the peg is not guaranteed and depends heavily on market sentiment, oracle security, and the overall economic design. Integrating these tokens into DeFi protocols can be complex and may lead to unexpected behavior if the protocols are not designed to handle rebasing.
Caveat
Despite the mechanism aiming for a price target, the market price of elastic supply tokens can deviate significantly and persistently from the peg. Users must understand that their token *quantity* changes, which impacts the total USD value of their holdings based on the current market price, not just the target price. These are often considered highly speculative assets.
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