Flexible tokens and flexible finance may be different from what you think.
Written by: AmpleSense DAO, the decentralized autonomous organization of the alternative stablecoin project Ampleforth Ecosystem Compiler: Perry Wang
” Elastic Finance ” (EeFi) has brought exciting currency and technological innovations that have never been seen in the cryptocurrency market for many years. The emerging flexible financial sector led by Ampleforth launches tokens that will dynamically adjust the supply. This dynamic adjustment is called ” rebase “. “Rebase” enables crypto assets (measured by price) to absorb demand to significantly reduce asset volatility.
In theory, rebase makes the price of flexible financial assets such as algorithm stablecoins relatively stable compared to Bitcoin BTC and Ethereum ETH.
But like any emerging disruptive innovation, the rise of flexible finance has caused intense controversy, confusion and debate among developers, investors, and others. In fact, the current main views surrounding elastic finance are negative, mainly due to four factors:
- Insufficient understanding of rebase: rebase is the automatic increase (positive rebase) or decrease (negative rebase) of the token supply according to demand, and the demand for heat is measured by price. The first confusing question is how or why the token balance is rebase. The second question is how can rebase reduce price fluctuations without collateral. Unfortunately, many investors bought such assets without understanding flexible assets, causing some people to lose a lot of money.
- Price fluctuations: Many people criticize flexible assets for failing to achieve the same stability guarantees as centralized and semi-centralized stablecoins.
- Concerns about practicality: Flexible assets are highly experimental, and the use cases of these tokens have not been clearly explained to you. This has led many observers to regard flexible finance as “Ponzi economics”, or believe that the rebase series of tokens do not bring obvious benefits compared to traditional cryptocurrencies.
- The popularity is very limited: So far, elastic assets have been mainly used for speculation and have not been integrated into many popular DeFi projects. This is because in most cases, flexible tokens cannot be combined with the DeFi protocol. In addition, developers and their communities believe (or gradually believe) that these assets will not bring additional or desired utility.
Now, it is time to re-examine flexible finance and discard traditional (negative) views.
Our purpose of writing this article is to clarify common questions and respond to criticisms of flexible finance:
- Provide a clear explanation of what rebase is designed for and how important it is to the wider crypto economy
- Help users, investors, developers, and others to objectively evaluate flexible assets to determine which assets are worthy of attention and may have the greatest success
- In addition to the presentation resilient asset trading and speculative purposes
- Introduce resources that can be used to improve and expand the understanding, implementation, and development of flexible finance
What are the benefits of Rebase?
Let them start by looking at the definition of rebase. Many people pay more attention to the working mechanism of rebase, especially from the perspective of mathematics and smart contracts, how this mechanism triggers the increase and decrease of token supply (both positive and negative rebase). The working mechanism of Rebase is indeed very interesting, but we believe that it is more important to focus on the reason , not the method.
What is the reason for the existence of Rebase? The sole purpose of Rebase is to incentivize individuals to engage in token trading activities and help tokens achieve stability around a specific price range or target price.
According to AmpleSense DAO and www.amplesense.io , the two types of rebase “symmetric/asymmetric rebase” are defined as follows:
- Symmetric (standard) Rebase : After Rebase, the token balances in all wallets increase or decrease in the same proportion.
- Asymmetric (non-standard) Rebase : The balance in all wallets will not increase or decrease in the same proportion after Rebase. For example, some people accept negative rebase. Those who voluntarily reduce their token balance will receive higher rewards when they rebase.
Ampleforth, the originator of flexible assets, uses a symmetric rebase mechanism. Since the launch of Ampleforth, many teams have launched flexible tokens with asymmetric rebase , the main purpose of which is to reduce the impact of negative rebase (supply contraction) on all token holders.
Regardless of whether the rebase is symmetrical or asymmetrical, the pros and cons of flexible tokens should be based on the relative stability achieved around the target price range (or price anchoring) over a long period of time . If the flexible token has been unable to achieve price stability for a long time, its main function has failed.
For example, taking 12 months as an example (December 2019 to December 2020), the price of Ampleforth is basically around $1 . See the figure below for details. (Ampleforth’s price target is to be within plus or minus 5% of the dollar value in 2019.) At the same time, Ampleforth’s market value has increased by approximately 27,000% (from 1.35 million USD to 367.1 million USD).
Ampleforth price target performance: December 2019 to December 2020, data sources: AmpleSense DAO, DataMetrics Hub, forum.amplesense.io
From a practical perspective, users and development teams can develop products, services and applications that utilize the following advantages:
- The stability of certain flexible assets. For example, they proved capable of eventually returning to the target price range (if they actually achieved this difficult feat)
- Positive rebase has the ability to bring organic liquidity without the need to inject additional capital (assuming asset demand growth) or collateral
Flexible assets are sloppy and charming, we will show you the truth
In view of the explosive popularity of Ampleforth in July 2020, dozens of teams have subsequently launched flexible assets using symmetric and asymmetric rebase mechanisms. Resilient assets are so fascinating that many people do not know how to judge which agreements are worth investing their time and attention. We hope to evaluate these projects through a new evaluation framework: The AmpleSense DAO flexible asset evaluation framework .
The framework focuses on five standards, which can be used to analyze the short-, medium- and long-term feasibility of flexible assets. We share this framework with the crypto community, hoping that it will encourage everyone to have full knowledge of the relevance and feasibility of various flexible assets, to have objective discussions, and to make wise decisions.
Evaluation criteria: credibility of the value proposition
Many flexible financial assets are constantly emerging, and the main focus is on rebase. Credible elastic assets are designed to meet specific goals (for example, to achieve token price stability without mortgages), rather than simply positioning rebase as a potential profit generating mechanism.
Scoring standard
- The value proposition has low credibility: the main goal of this type of asset is to provide potential profits to early investors through the rebase mechanism; other use cases are unclear, or the specific effect is inferior to standard encryption services.
- The value proposition is moderately credible: There are other ways to use standard encryption to achieve the asset’s specific goals, but rebae may help meet key unmet needs in centralized or decentralized finance.
- The credibility of the value proposition is high: the Rebase design mechanism is well matched to the asset target; and due to key reasons (for example, it may cause regulatory concerns, increase systemic risks, etc.), the effect of other encryption methods is very unsatisfactory.
Evaluation indicators: technical robustness and safety
For flexible financial assets to succeed, they must be secure, operate through transparent smart contracts, and require a strong technical infrastructure, such as oracles.
Scoring criteria :
- Low technical robustness and security: no security audit, weak technical infrastructure (for example, the risk of oracle attacks is high, or rebase requires manual triggering)
- Moderate technical robustness and security: there are security audits and oracles, but smart contracts are not open source, unverified or have hidden functions (for example, the agreement is driven by a non-publicly audited agency contract).
- High technical robustness and security: smart contracts are carefully audited, the code is open source, there are no hidden functions, and there are powerful oracles.
Evaluation indicator: decentralization
Excellent flexible financial assets must be highly decentralized, non-censorable and widely adopted.
Scoring criteria :
- Low degree of decentralization: asset ownership is highly centralized, transactions can be reviewed, and adoption is limited to the initial speculators.
- The degree of decentralization is moderate: asset ownership is slightly centralized, there is transaction review, but it will gradually withdraw, and the adoption is no longer limited to speculation.
High degree of decentralization: asset ownership is highly decentralized, the agreement has rich use cases, and transactions cannot be reviewed.
Evaluation indicator: regulatory risk
When investors, users and developers consider the long-term viability of different flexible assets, they should consider the new regulatory landscape surrounding cryptocurrencies, especially those related to issues such as stable currency issuance and securities supervision.
Scoring criteria :
- High regulatory risk: Flexible assets may be included in areas subject to strict supervision, such as algorithmic stablecoins, or the sale of tokens through non-compliant ICOs.
- The regulatory risk is medium: the asset is not a stable currency, but it is sold through a non-compliant ICO, or the asset may be classified as a security.
Regulatory risk is low: the asset is not a stable currency, the team has conducted a compliant ICO (or has not conducted an ICO), and the token does not meet the securities regulatory standards.
Evaluation indicator: time price stability
The primary goal of the Rebase mechanism is to achieve price stability of assets over a long period of time . Time price stability is a measure of the length of time an asset is within the target range. If the asset deviates from the target range, the supply reduction phase (negative rebase) will have more impact on investors, developers, and users than the increase (positive rebase).
Note: For flexible assets linked to the price of a single cryptocurrency, an index (such as a basket of currencies) or the total market value of crypto assets, higher time price stability may be more difficult to achieve.
Scoring criteria :
- Time price stability is low: the asset is outside the target price range most of the time—especially during negative rebases. This period of time means that the demand for the asset is insufficient; the market cannot manage deviations from the price target instead of being stable Flexible assets (for example, the asset is anchored to a specific cryptocurrency price).
- Time price stability is medium: The asset has been in the target price range for a long time, but it has also experienced a long-term increase in the supply of tokens as demand increases.
- Time price stability is relatively high: the asset is within the target price range most of the time, and the token supply has experienced a mild or limited increase and decrease phase (negative and positive rebase).
Are flexible assets useful? Still useless?
A common criticism of elastic assets is that they are useless except for speculation or fail to provide solutions to problems. but it is not the truth.
From the macro perspective of the crypto economy, elastic assets, especially those tokens that have proven their ability to serve as a general stable value store and medium of exchange, may promote the DeFi ecosystem to become more prosperous , and may even be used as currency to reach the current level. The height that cryptocurrency cannot reach.
Many observers and analysts pointed out that DeFi is becoming increasingly fragile due to its excessive reliance on mortgages and centralized stablecoins. Currently, policy makers and regulators in various countries are targeting stable currencies, focusing on reducing their influence and controlling their growth. One of the most recent developments is that US congressmen introduced the STABLE Act at the end of 2020, which will prohibit centralized and decentralized stable currency issuers from conducting this business without obtaining a bank license.
If flexible financial assets are widely adopted, it will greatly reduce the encryption ecosystem’s heavy reliance on centralized stablecoins, and provide a variety of ways to develop innovative and stable value stores and financial tools, and are only limited by governments and regulatory agencies. The constraints far exceed the benefits that stablecoins can provide.
It is true that using flexible assets to help DeFi reduce its regulatory loopholes is a long-term project. Is there any way to use elastic assets now? There is.
Are all flexible assets stable coins? no.
It should be noted that not all rebase assets are responsible for stable currency functions. Many observers classify all rebase assets into the stable currency category, which is inaccurate and incorrect. Different flexible tokens seek to achieve stability in different time periods. Algorithmic stable currency (using the rebase mechanism to achieve approximately equal to 1 US dollar or tightly anchored with the price of other legal currencies) is just one kind of flexible asset. There are other flexible assets , as shown in the table below.
Flexible assets: current functions
- Stable value storage and medium of exchange (for a longer period of time)
The design mechanism of Rebase aims to make tokens serve as a reasonable stable store of value (for example, the price returns to the target price range over time) and an asset that has no relevance to the mainstream market.
Example: Ample
- Algorithmic stablecoin (for example, the token price is anchored to 1 USD most of the time)
Rebase combines other technologies that encourage supply reduction to help the token maintain the anchor of the value of 1 dollar with the smallest possible deviation.
Example: Empty Set Dollar
- Rebasing index/crypto-anchored tokens (for example, tracking the total market value of crypto tokens, etc.)
Rebase is bound to dynamic targets, such as the total market value of encrypted tokens, or the price of a specific cryptocurrency, providing investors with the opportunity to obtain large markets or emerging protocol/token positions through a single asset.
Examples: Base Protocol, Digg
We reserve our attitude as to which use case will have the greatest impact in the future. Over time, the market will determine which use cases are the most successful and have the highest value for the crypto ecosystem.
The following three tables describe the emerging and envisioned (not yet launched) use cases of flexible financial assets . Our DAO is developing several of them.
In the coming months and years, countless related use cases will be rolled out one after another, including the use of flexible assets as the pricing unit of financial contracts .
The road is ahead: visions for the next few years
Resilient finance represents a very important innovation in the encryption field, on par with the release of Bitcoin and Ethereum. Similar to Bitcoin and Ethereum, the first rebasing asset (Ampleforth) helped drive the continuous expansion of flexible financial innovation.
Over time, rebase will eliminate its own negative image and misunderstandings and grow into an indispensable and widely accepted component of DeFi. It took more than ten years for people to gradually understand and begin to accept Bitcoin more widely. Similarly, it may take many years for flexible assets to reach their full potential and become popular.
But we do not need to wait for the distant future to truly benefit from flexible finance. As we explained in this article, flexible assets can be assessed objectively, have clear and critical purposes, and have use cases that go far beyond speculation and trading .
We look forward to helping promote innovation, interpretation, tracking, and development of a resilient financial ecosystem as this crypto sub-sector matures. In the future, we will also publish new insights on how flexible finance has evolved and affected DeFi and the broader crypto market.
