Rationales

From a macroeconomic standpoint, supporting elastic cryptocurrencies is a way of supporting stability. The volatility in crypto, while not terribly unexpected given its state of infancy, has been a deterrent for traditional investors and would-be users. The notion of sending Bitcoin to an associate who wants to use and view it as money is a risky proposition. Whilst en route between parties, the asset could fluctuate enough to create a pain point for the sender or receiver. Elastic tokens are said to be contract friendly for their potential stability.

Case Study*

Ampleforth and Balancer jointly developed a smart pool jointly to mitigate against impermanent loss (“IL”). As an AMM, the sub-optimal approach to rebalancing assets is an inefficiency that has both hindered and deterred liquidity providers. Ampleforth, as an elastic token, offers a potential solution as a “crossover currency” which aims to bridge floating-price tokens and stablecoins. Naturally, one does not have to project too far into the future to realize the potential value of rebasing supplies as trading pairs for automated market makers.

How it works:

  • Balancer allows customizable assets and weights within a pool.

    • e.g. you can have 80/20 or even 95/5 pools on Balancer.

  • Uniswap only allows 50/50 pools.

  • Balancer simultaneously updates the smart pool weights during rebases.

  • Volatility shifts from price to supply, removing IL associated with supply changes.

Example:

  • AMPL/USDC smart pool starts out with an even 50/50 ratio.

  • AMPL supply grows 2x, and the pool automatically shifts to 33/66 ratio.

  • AMPL supply contracts to original amount, and the pool rebalances to 50/50 again.

*Source: https://medium.com/ampleforth/ampl-usdc-smart-pool-on-balancer-be8eed9a264

Token elasticity goes a long way towards solving the ubiquitous issue of arbitrage in automated markets. In the case of above, the weighting of AMPL and USDC changes with the supply. Described as “smart pools,” we are beginning to see the innovation and use cases emerge. Witnessing what it can do to insure against value leakage and rebasing manipulation is novel.