Elastic Supply
Elastic Supply refers to a type of cryptocurrency token model where the supply of tokens automatically adjusts based on price fluctuations. The goal of an elastic supply model is to stabilize the token’s price by expanding or contracting the supply according to demand.
What is Elastic Supply?
In an elastic supply model, the total supply of a token is designed to change dynamically in response to market conditions, aiming to maintain a target price. Unlike traditional fixed-supply cryptocurrencies, elastic supply tokens use "rebases" to manage supply.
How Does Elastic Supply Work?
The model operates through several mechanisms:
Rebasing: The smart contract periodically adjusts the token supply based on its current price relative to a target.
Expansion and Contraction: If the token price rises above the target, supply expands, while it contracts if the price falls below.
Proportional Holdings: Although the token count changes, the percentage of each holder's total supply remains constant during rebase events.
Why is Elastic Supply Important?
Elastic supply tokens introduce unique possibilities in the crypto market:
Price Stability: The rebase mechanism helps maintain a stable price, making the token more predictable for users.
Market Adaptability: The supply adjusts based on demand, helping the token adapt to market fluctuations.
Experimental DeFi Models: Elastic supply models have led to innovative DeFi products, exploring new economic mechanisms within blockchain.
In summary, elastic supply tokens adjust their supply to target a specific price, offering a unique mechanism for price stability and adaptability in volatile markets.