Elastic finance (EeFi) offers an exciting monetary and technological innovation, the likes of which has not been seen in the cryptocurrency market in many years. The emerging elastic finance sub-sector – led by Ampleforth – features tokens that experience dynamic supply adjustments called rebases. The rebase allows crypto assets to absorb demand (as measured by price) in order to produce significant reductions in volatility. In theory the rebase should help elastic finance assets be relatively price stable — as compared to Bitcoin and Ethereum.
However, as is common with any new and disruptive innovation, the rise of elastic finance has led to controversy, confusion and debate among developers, investors and others. In fact, the current sentiment around elastic finance is negative, primarily due to four factors:
It’s time to take a second look at elastic finance and move past the conventional (negative) wisdom.
Our goal is to address common points of confusion and critiques of elastic finance by:
Let’s start out by revisiting the rebase. Many tend to focus on the mechanics of the rebase – specifically what triggers (from a mathematical and smart contract perspective) token supply expansions and contractions (positive and negative rebases). While the mechanics of the rebase are interesting, we think it is much more important to focus on the why rather than how.
Why does the rebase exist? The sole purpose of the rebase is to incentivize individuals to engage in buying and selling activity that helps a token achieve stability around a specific price zone or target. There are two types of rebases: symmetric and asymmetric, as defined in the table below.
Ampleforth, the original elastic asset, has a symmetric rebase. Since Ampleforth was launched, a number of teams have introduced elastic tokens featuring asymmetric rebases, mainly in an effort to reduce the impact of negative rebases (supply contraction) on all token holders.
Whether the rebase is symmetric or asymmetric, elastic assets should be judged on their ability to maintain relative stability around their target price zone (or price peg) over extended periods of time. If an elastic asset has not achieved price stability over time, it has failed in its primary function.
For example, over a 12 month period (December 2019 to December 2020), Ampleforth’s price largely hovered around $1.00, as shown in the image below. (Ampleforth’s price target is plus or minus 5% the price of the 2019 US dollar.) During the same period, Ampleforth’s market capitalization grew roughly by 27,000% ($ 1.35 M to $ 367.11 M).
From a utility perspective, users and development teams can develop products, services and applications that leverage:
Since Ampleforth exploded in popularity in July 2020, dozens of teams have introduced elastic assets featuring symmetric and asymmetric rebase mechanics. This flood of elastic assets has left many people asking how they can determine which protocols are worth their time and attention. Here we introduce a new resource: The AmpleSense DAO Elastic Asset Assessment Framework. The Framework features five criteria that can be used to analyze the short-, medium- and long-term viability of elastic assets. We are sharing this Framework with the crypto community in the hopes that it will encourage informed, objective discussion and decision-making about the relevance and viability of various elastic assets.
Many elastic finance assets are being launched where the primary focus is on the rebase. Credible elastic assets will be designed to meet specific objectives (e.g., achieve price stability without collateralization), rather than simply positioning the rebase as a potential profit-generating mechanism.
To be successful, elastic finance assets must be secure, operated via non-opaque smart contracts, and require the presence of a robust technical infrastructure, such as oracles.
Successful elastic assets must be highly decentralized, non-censorable and widely adopted.
Investors, users and developers should consider the emerging regulatory landscape surrounding cryptocurrencies, especially as they relate to issues such as stablecoin issuance and securities regulations, when considering the long-term viability of different elastic assets.
The primary objective of the rebase mechanic is to achieve price stability over time. Temporal Price Stability is a metric that measures the amount of time the asset spends within its target range. If an asset is outside its target, the contraction phase (negative rebase) is more impactful on investors, developers and users than expansion (positive rebase).
Note: It may be more difficult for elastic assets pegged to an individual cryptocurrency’s price, index (e.g., basket of currencies) or total crypto market capitalization to achieve high temporal price stability.
A common critique of elastic assets is that they serve no other purpose than speculation, or offer a solution in search of a problem. This is not the case.
From a macro crypto perspective, elastic assets – specifically those with proven ability to serve as generally stable stores of value and mediums of exchange — could lead to a more robust DeFi ecosystem, and even used as currencies, an achievement that no crypto has achieved.
Many observers and analysts have noted that DeFi is increasingly vulnerable due to its over-reliance on collateralized and centralized stablecoins. Currently, policymakers and regulators are taking aim at stablecoins, with an eye toward reducing their impact and controlling their growth. One of the most recent developments was the publication of the STABLE Act in late 2020, which would prohibit centralized and decentralized stablecoin issuers from operating without securing a banking charter.
If adopted widely, elastic finance assets could greatly reduce the crypto ecosystem’s reliance on centralized stablecoins, and provide multiple ways to develop innovative, stable stores of value and financial instruments that have limited exposure to governments and regulators — and go beyond what stablecoins can offer.
Admittedly, utilizing elastic assets to help DeFi reduce its regulatory vulnerabilities is a long-term project. Are they any ways elastic assets are being utilized right now? Yes.
Are All Elastic Assets Stablecoins? No.
It is important to note that not all rebasing assets function as stablecoins. Many observers group all rebasing assets into the stablecoin category, which is inaccurate and incorrect. Different elastic tokens seek to achieve stability over varying time periods. Algorithmic stablecoins (that use the rebase mechanic to achieve a tight peg around $1 USD or another fiat currency) are only one type of elastic asset. There are others, as the table below illustrates.
Rebase is designed to enable the token to function as a reasonably stable store of value (e.g., price generally returns to a target range over time), and uncorrelated asset.
Example: Ample
Rebase is combined with other techniques that encourage token supply reductions, to help the token maintain a peg as close to $1 as possible.
Example: Empty Set Dollar
Rebase is tied to a moving target such as the total crypto market cap, or price of a specific cryptocurrency to provide investors with exposure to a large market or growing protocol/token via a single asset.
Example: Base Protocol, Digg
We are reserving judgment on which of these use cases will be most impactful. Over time the market will determine which ones are most successful and valuable to the cryptocurrency ecosystem.
The objective of our independent, community-powered organization (the AmpleSense DAO) is to foster the development of a broad and robust elastic finance ecosystem. Given this, we have put a lot of thought into the various ways rebasing tokens can be utilized – along with the risk of these activities. Risk is defined as the potential for capital loss related to buying, trading holding or using these assets. The three tables below describe emerging and novel (un-launched) use cases for elastic finance assets. Our DAO is working on developing a few of these implementations currently.
There is potential for numerous other use cases to be introduced over the coming months and years, including using elastic assets as a unit of account in financial contracts.
Elastic finance represents a profoundly important innovation in crypto, on par with the introduction of Bitcoin and Ethereum. Similar to Bitcoin and Ethereum, the first rebasing asset (Ampleforth), helped to launch an expanding crop of elastic finance innovations.
Over time the rebase will shift from a source of negativity and misunderstanding to an integral and accepted part of DeFi. It took more than 10 years for people to understand and begin to more broadly accept Bitcoin. Likewise, it may take many years for elastic assets to reach their fullest potential and adoption.
But we do not have to wait for the far future to benefit from elastic finance today. As we have shown, elastic assets can be objectively evaluated, have a clear and vital purpose, and possess use cases that go far beyond speculation and trading.
We look forward to helping to innovate, explain, track and grow the elastic finance ecosystem as this sub-sector matures. We’ll be back with new insights about how elastic finance is evolving and influencing DeFi and the broader crypto market in the future.
The AmpleSense DAO leadership team developed this essay. The DAO is an independent, community-powered organization focused on improving understanding and adoption of Ample and other high-quality elastic finance assets. The DAO’s governance token is kMPL. Learn about and join the DAO’s mission at www.amplesense.io.