What are Elastic and Rebase Tokens, respectively?

The rapid success of Terra (LUNA) and TerraUSD invites consideration of which concepts can be used to link cryptocurrencies to other assets. One principle is called Elastic or Rebase Token.

The data service Coingecko currently counts a good 50 cryptocurrencies that belong to the rebase token category. Elsewhere, such altcoins are also called Elastic Tokens. With a combined market capitalization of around USD 1 billion, rebase tokens such as Ampleforth (AMPL) have hardly played a role in the overall crypto market so far. But the principle behind rebase tokens is attracting increasing interest because it offers a solution for how to design cryptocurrencies that are as tightly coupled as possible to certain other assets. Prime examples of such use cases are stablecoins, which mirror the U.S. dollar, and have so far almost always been backed by cash reserves.

But rebase tokens rely not on reserves for their peg, but on an automated and regular adjustment of the number of circulating coins. When the price of Ampleforth starts to move significantly away from the predefined benchmark of $1, the Rebase method kicks in. Determined by algorithms and organized by smart contracts, each Ampleforth wallet is then either allocated additional AMPL or AMPL are destroyed there (“burning”). With this intentional artificial inflation or shortage of Ampleforth, the price is to be kept stable, the rebase takes place every 24 hours.

Isn’t Terra (LUNA) with the stablecoin TerraUSD (UST) then also a rebase token? True, TerraUSD is not a traditional stablecoin, which is backed by reserves in US dollars like Tether (USDT) or USD Coin (USDC), thus guaranteeing the fixed peg. But in TerraUSD, LUNA serves as a hedge and accordingly, for more or less UST, LUNA must also be used in each case. Such a mechanism does not exist for rebase tokens. Here, no collateral is used, but only the number of circulating tokens is artificially regulated to reach the target price.

However, this did not really work in the case of Doge Killer (LEASH), for example. This altcoin, originally intended as a rebase token, is based in the Shiba Inu (SHIB) ecosystem and was supposed to align with the price of Dogecoin (DOGE). However, the plan did not work out and LEASH was released, its price now emerging from supply and demand.

Conclusion: rebase token with moderate success.

According to Coingecko, the most important rebase token by market capitalization is Olympus (OMH), but among the most important cryptocurrencies, it only emerges lagging at a rank around 160. Significant price fluctuations for Olympus, which is supposed to be useful for DeFi under Ethereum (ETH), show, as with other rebase tokens: The concept sounds interesting in theory, but has not proven convincingly in practice so far.

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