The world of decentralized finance has witnessed a surge of innovative kinds of financial products. This is where elastic supply tokens come in. Elastic supply token is one of the new concepts of the decentralized finance sector that are probably less known. With the help of smart contracts, elastic supply token’s supply algorithmically happens to be adjusted with another procedure known as rebases. On the contrary, elastic supply tokens also are recognized as rebase tokens. This article throws light on the concept of elastic supply tokens, their working principle, why are they needed, and others.

Also Read: FAQs on Bitcoin: Things to Consider Before an Investment 

Definition of Elastic Supply Token

By elastic supply tokens, we mean an asset whose supply is entirely based on its price and varies accordingly. The total supply of tokens concerning the elastic supply project happens to be essentially adjustable. It indicates that the total supply of tokens of a specific cryptocurrency project modifies through rebases periodically.

The Need For Elastic Supply Token

The primary concept behind the idea highlights that the value of elastic supply tokens stays stable. It happens to be achieved with the help of supply adjustments. They are usually considered identical to stablecoins because of their desire for keeping the value stable. But, there are pretty primary differences between the two of them.

The concept of stable coins highlights a fixed exchange rate principle. It keeps the price of the stable coin stable by pegging the price of the coin to another asset. On the contrary, elastic supply tokens vouch for a targeted price with a time-varying supply of tokens. Elastic supply tokens do not necessarily attempt to eliminate the volatility, unlike stablecoins. Rather, they intend to decrease it to such an extent where the sought value of the elastic token is achieved.

The total supply of the project happens to be adjusted with its price increment, thereby making the supply increase accordingly. With an enhanced supply, the importance of every token goes down. Along the same lines, with a cost reduction, the total supply of the project happens to be reduced accordingly for moving the price up. It throws light on the same supply and demand logic for driving the total token supply of the project.

Elastic Supply Token: Risks Involved and More

If you decide to invest in an elastic supply token, your investment might be considered risky. When it comes to elastic tokens, the possibility of losing your funds might be higher. Certainly, it can boost your gains on the upside, however, it also can amplify your losses.

In case of rebate occurrences, while the price of the token happens to be going down, you are not only going to lose your money from the price of the token decreasing, but you will also own lesser tokens after every rebate. On the contrary, elastic supply tokens are considered as an experimental asset that enhances the possibilities for token supply projects to possess bags within their smart contract code. It is another reason why you should consider your investment in elastic supply tokens as risky.

Also Read: Non-Fungible Token Use Cases Across Industries

To Conclude

Apart from being new in the field of decentralized finance, projects related to elastic supply tokens proceed to gain popularity and might open numerous use cases within the sector of decentralized finance. Tokens that come with elastic prices may additionally pose themselves as an option to stablecoins in the near future.

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