Elastic supply tokens have a changing supply in circulation, adjusting to maintain a target price instead of experiencing price volatility. This is achieved through events called rebases.

Imagine if Bitcoin's protocol could change the number of bitcoins in wallets to maintain a specific price. Elastic supply tokens work similarly, adjusting the circulating supply according to the token's price through a mechanism called rebasing.

How do elastic tokens work?

Elastic supply tokens use rebasing to change the token supply based on an algorithm. This process aims to peg a token to a certain price while considering supply and demand. The number of tokens in users' wallets changes during a rebase, but their proportional assets stay the same.

Elastic supply tokens share some similarities with stablecoins as both aim to maintain a certain price. However, stablecoins use collateral, while rebase tokens change supply to achieve a fixed rate.

Risks associated with elastic supply tokens

Investing in elastic supply tokens is risky due to the potential for losing funds and the experimental nature of these assets. Understanding the mechanisms behind elastic supply tokens is crucial before investing, as looking at price charts alone won't be helpful since the number of tokens changes after each rebase.

In summary, elastic supply tokens are a novel approach to maintaining a target price for cryptocurrencies. They work through rebasing, which adjusts the circulating supply based on an algorithm. While they share some similarities with stablecoins, they are riskier investments due to their experimental nature and potential for losses. Understanding the mechanisms behind these tokens is essential for making informed investment decisions.