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Elastic Supply Tokens, Are They The Future Of Stablecoins in 2021?

Elastic Supply Tokens, Are They The Future Of Stablecoins in 2021?

Elastic Supply Token

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Elastic supply tokens, or rebase, work in a manner that their circulating supply expands or contract due to the changes that happen in the token price. They have a changing circulating supply and their operation idea is that instead of price volatility, token supply changes through rebases. The increase or decrease in supply is what is known as rebasing.

What if the bitcoin protocol can adjust how much bitcoin is in the user wallets to achieve a targeted price. Today you have one bitcoin, tomorrow you have two BTC but they are worth half of what they were the previous day. In general, that is how a rebase mechanism works.

Overview

Decentralized finance (DeFi) has introduced an assortment of new financial products on the blockchain. Some that have already gained popularity are tokenized Bitcoin on Ethereum, flash loans, yield farming, and Uniswap. The other segment of the crypto industry that has become interesting to review and follow is elastic supply tokens, commonly known as the rebase tokens.

The distinct mechanism behind them enables users to do lots of experimentation. Whenever a rebase happens, the token supply is decreased or increased algorithmically, according to the prevailing price of every token.

Elastic supply tokens can be compared to stablecoins in some ways. They are designed to achieve a target price and the rebase mechanisms are known to facilitate that. Nevertheless, the main difference is that these rebasing tokens are designed to achieve the price with a changing (elastic) supply.

But many ask, aren’t many cryptos operating with an ever-changing supply? The answer to that question is a somewhat ‘YES’. Today, 6.25 new bitcoins are minted with every block. After the 2024 halving, that amount will reduce to 3.125 BTC per block. Since it is a predictable rate, it is to estimate how much BTC will exist in 2022 or after the next halving event.

Notably, the supply-elastic tokens work differently since the rebasing mechanism adjusts the token circulating supply frequently. For instance, if an elastic supply token aims to achieve a value of $1, the rebase increases the current supply if the price is above the target. The increase in supply reduces the value of every token.

On the other hand, if the price is below $1, the rebase decreases supply which makes every token worth more. It means that the amount of tokens that users have in their wallets keeps changing whenever a rebasing happens.

If one has 100 Rebase USD (rUSD), which is a hypothetical token that targets a $1 price, the balance in their hardware wallet keeps changing. If the price drops below $1, one may have 94 rUSD in their wallet after rebasing. However, each of these rUSDs will be worth more than before the rebase.

The idea behind it is that your holdings that are proportional to the total supply remain constant with the rebase. This strategy ensures that one’s holdings proportional to the total supply do not change with the rebase. If one had 3% of the supply before the rebase, they should have 3% after it even if the number of coins in the wallet changes.

Thus, users get to retain their share of the network regardless of the price at any given time.

The Shortcomings Of Elastic Supply Tokens

Although they seem to be a great solution to the high volatility associated with the crypto market, elastic supply tokens are highly risky and quite dangerous forms of investment. It is advisable to invest in them only when one knows what they are doing.

Reviewing price charts might not be all that helpful because the number of tokens one holds will change after rebases happen. The strategy can amplify gains on the bright side or amplify losses on the flip side. If rebases happen when token prices are dropping, users lose money from the token price going down and own lesser tokens after every rebase.

Since they are challenging to comprehend, investing in rebasing tokens results in losses for many traders. It is only advisable to put money in elastic supply tokens if one is fully aware of the mechanisms that power them. Otherwise, investors who are not knowledgeable are not in control of their investment and cannot make informed decisions.

Rebasing Token Examples

Ampleforth

Ampleforth (AMPL) was among the first coins that work with an elastic supply. The coin aims to become an uncollateralized synthetic commodity, where 1 AMPL aims for a price of $1.00. Rebases in this market happens once after 24 hours.

This project had little traction until a liquidity mining campaign known as Geyser got introduced. This scheme distributes tokens for participants over a 10-year duration. Geyser is a major example of how liquidity incentives can create considerable traction for decentralized finance (DeFi) project.

Although it is technically a stablecoin, the AMPL price chart shows how volatile the elastic supply tokens get.

The AMPL price targets $1, but it can be quite volatile nevertheless.

Please note that the price charts show the price of individual AMPL tokens and do not take into account the changes that happen in supply. Ampleforth is quite volatile which makes it a risky coin to invest in.

It might be more sensical to chart elastic supply tokens in terms of market capitalization because the price of the individual units does not matter as much. The market capitalization may act as a better barometer of the network’s growth and traction.

AMPL market cap on a logarithmic scale.

Yam Finance

Yam Finance is an example of the elastic supply tokens that have gained significant traction. The Yam protocol’s general design is somewhat a mashup between Synthetix’s staking system, Ampleforth’s elastic supply, and yearn.finance’s fair launch. Notably, YAM tokens also target a price of 1 USD.

YAM is a community-owned experiment because all of the tokens were distributed via liquidity mining. There was no founder or pre-mine allocation which means that the space for the acquisition of these tokens was uniform for everyone using a yield farming scheme.

Being a new and barely known project, Yam acquired 600 million dollars of value locked in its staking pools within two days. What might have attracted massive liquidity could be how YAM farming was particularly targeting the holders of some of the popular DeFi coins. These were MKR, SNX, ETH, COMP, ETH-AMPL Uniswap LP, LEND, LINK, and YFI tokens.

Nevertheless, a bug in the rebasing mechanism affected the project with more supply minted than was planned. This project was eventually relaunched and then migrated to a new token contract supported by a community-funded audit and joint effort. Today, the future of Yam is entirely in the hands of YAM holders.

The Takeaway

Many now believe that elastic supply tokens are some of the innovations to watch out for in DeFi. As it is clear, these are tokens and coins that can algorithmically adjust their supply aiming to achieve a target price.

For now, these tokens may be in the experimental stage but might eventually gain massive traction and carve out their niche. At first, it might be challenging. However, several new DeFi protocol designs are in the pipeline which may take the idea further.

Source: https://e-cryptonews.com/elastic-supply-tokens-are-on-the-rise/

Blockchain

CBOE files to list Van Eck’s proposed Bitcoin ETF

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Globally leading exchange holding company, Chicago Board Options Exchange, or CBOE, has filed to list the Bitcoin exchange-traded fund proposed by asset manager, Van Eck.

CBOE filed a Form 19b-4 requesting permission to list the ETF from the U.S. Securities and Exchange Commission on Jan. 3. In the form, CBOE emphasizes the benefits an ETF would offer to retail investors over the spot Bitcoin markets, including custody:

“Exposure to bitcoin through an ETP also presents certain advantages for retail investors compared to buying spot bitcoin directly. The most notable advantage is the use of the Custodian to custody the Trust’s bitcoin assets.”

While CBOE did not reveal who its custodian is, the document notes its custodian is “a trust company chartered and regulated by [the New York Department of Financial Services].”

Once the SEC has formally acknowledged it is reviewing the application, the regulator has 45 days to deliver its verdict or extend the assessment deadline. The SEC can extend its deliberation period for up to 240 days before finalizing its decision.

If approved, the ETF would be the first crypto product offered by CBOE since February 2019, with CBOE having then ceased offering Bitcoin futures contracts. In December 2017, CBOE became the first regulated financial institution in the United States to offer Bitcoin futures contracts, beating out the Chicago Mercantile Exchange by just a couple of weeks.

In January, Van Eck filed for SEC approval of a Bitcoin ETF. While Van Eck had previously filed for a BItcoin ETF in 2017, the firm also teamed up with SolidX — a blockchain firm that had been attempting to bring a Bitcoin ETF to market since 2015 — to file for a jointly issued ETF in 2018. The joint application was withdrawn in September 2019, with the two firms parting ways shortly after.

However, Van Eck’s latest filing has become the subject of a lawsuit from SolidX, who alleges Van Eck plagiarized their product.

Van Eck also filed for an ETF tracking the performance of prominent crypto firms on Jan. 21. The product would seek the price and performance of the Global Digital Asset Equity Index — which is run by its subsidiary MV Index Solutions.

As of this writing, the SEC is yet to approve any crypto ETF product.

Source: https://cointelegraph.com/news/cboe-files-to-list-van-eck-s-proposed-bitcoin-etf

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Blockchain

Coinbase custodies 11% of entire crypto capitalization

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Crypto data aggregator Messari has reported that the quantity of crypto assets stored in custody on U.S. exchange giant Coinbase surged in the last quarter of 2020.

Messari Crypto has revealed that as much as 11% of the entire crypto market capitalization was held with Coinbase custody at the end of last year. The Coinbase offers custody services for over 90 crypto assets, roughly half of which are tradable on Coinbase’s exchange.

The value of assets custodied with Coinbase spiked to roughly $90 billion in the fourth quarter of 2020 as the combined crypto capitalization more than doubled to tag $780 billion by 2021.

Despite the wide variety of assets supported by Coinbase Custody, Messari found that Bitcoin and Ethereum account for 83% of the cryptocurrency held with Coinbase.

While Bitcoin consistently represented 70% of the assets custodied with Coinbase during 2019 and 2020, Ethereum increased from 9% to 13% over the same period.

The findings were published in a report examining Coinbase’s anticipated public listing that was compiled by Messari researcher Mira Christanto.

Christanto reported that 95% of Coinbase trading revenues are from retail clients, who pay 30 times more than institutional customers. She also noted a pre-IPO valuation at 7% of the total crypto market cap which would equate to around $107 billion according to the sector’s current market cap of $1.54 trillion.

According to the S-1 report Coinbase submitted to the Securities and Exchange Commission on Feb. 25, the exchange posted a direct revenue of $1.1 billion in 2020 mostly from trading fees.

In a Feb. 25 blog post to its clients, Coinbase revealed that Bitcoin and other crypto assets have comprised a major share of its corporate treasury since the company’s founding back in 2012.

Source: https://cointelegraph.com/news/coinbase-custodies-11-of-entire-crypto-capitalization

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Blockchain

Leverage traders ‘flushed out’ by late-February crypto crash: Glassnode

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According to on-chain analytics provider, Glassnode, the late-February crypto market correction may have purged excessive leverage from the markets.

On March 1, Glassnode published a report analyzing the recent crypto crash — which was only the second significant crypto correction since the markets pushed into new record highs in late 2020.

Glassnodenoted the crash peaked with a 25% fall from the local top of $58,300 to $43,343. As such, the move was weaker than January’s dip which saw a roughly 30% retracement from $42,000 to less than $30,000.

The analytics provider suggested that these pullbacks are positive for the crypto markets overall, attributing the latest correction to liquidated leveraged positions held by risky speculators:

“Significant market corrections are positive events in that they flush out speculation, leverage, weak hands, and test holder conviction.”

The report added that several key market indicators were reset as BTC prices found fresh support, including futures open interest, futures funding rates, and the price premium for Grayscale’s investment products.

Futures open interest, which is the total number of outstanding contracts that have not been settled, dropped almost $4 billion or 22% from its peak of $18.4 billion. Glassnode also commented noted perpetual futures funding rates have also reset close to zero, which could indicate that traders are not willing to enter short positions, stating:

“Previous combinations of decreasing open interest and a reset of funding rates have indicated a flush in speculative trading has occurred.”

However, the report did note that open interest is still hovering roughly $2.5 billion above the previous peak of $3.9 billion on Feb. 21 — meaning there is still significant leverage within the market.

Glassnode also noted that shares in Grayscale’s Bitcoin Trust are trading at a discount compared to spot market prices for the first time ever, with investors paying a nearly 4% discount to access exposure to BTC through Grayscale’s trust.

It added that competing products such as Canada’s Purpose ETF could diminish Grayscale’s premium as more institutional products enter the market and close arbitrage opportunities.

At the time of writing, Bitcoin prices were up 5.3% over the past 24 hours, with BTC currently changing hands for $49,200.

Source: https://cointelegraph.com/news/leverage-traders-flushed-out-by-late-february-crypto-crash-glassnode

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