Understanding the key difference between stable coins and Elastic/Rebased token

Cryptocurrency has become a staple of the global economy of today. It presents a cheaper, easier, and user-friendly means of conducting financial transactions across borders. Additionally, it can serve as a store of value; decentralized and secure with blockchain technology.

However, as praised as digital currency is, it has one major drawback; instability. The crypto market is prone to temperamental up and down swings to a degree that outstrips any other asset. For instance, between April and July of 2021, Bitcoin dropped from $63,558 to a low of $29,796. By September it was up again, trading at $52,693 only to drop two weeks after.

To curb this volatility, a new type of currency arrived on the scene, stablecoins; a digital currency created to mirror the price of chosen local currencies.

The idea behind this type of digital asset is to create stability by pegging stablecoins to a less volatile asset like fiat currency. The tokens are then propped up or collateralized with reserves of fiat money, gold, government-issued bonds, or sometimes other cryptocurrencies.

Popular examples of this type are Tether USD (USDT) the first stablecoin ever, pegged to the US dollars, and Terra's UST, backed with Bitcoin reserves although the latter was not successful.

Elastic/ Rebased tokens on the other hand attempt to maintain a value equivalent to another asset just like stablecoins. However, the difference between stablecoins and rebased tokens lies in the way they maintain their pegs.

While reserves of assets stabilize stablecoins, rebased tokens maintain their peg by changing the available supply of tokens algorithmically to create scarcity. So where the price of rebase tokens remains relatively stable depending on the asset it is pegged to, its supply fluctuates wildly. Popular rebase tokens include Olympus, Temple, Ampleforth, etc.

This difference is key because it can affect how and who should trade or invest in what currency for the safest and most profitable returns. In this article, we will examine this disparity and how you can leverage them for your varied investments and trading needs.

Keywords; Rebase tokens, stablecoins, rebase token market cap, stable coin examples, Bitcoin, uses of stablecoins.

A Brief EXPO on the Evolution of Cryptocurrency.

The world has come a long way from 2009 when Bitcoin was the only cryptocurrency struggling to gain acceptance as a viable currency for cross-border transactions.

Since Bitcoin, multiple cryptocurrencies and tokens have flooded the market. As of 2022, there are between 15,000 to 18,000 cryptocurrencies on the crypto market place with more being added by the day.

Stablecoins and rebased tokens are some of the many ways cryptocurrency has evolved. These two digital assets are very similar in many ways yet different in operation. Let's examine them in turn.

What are Stablecoins?

Stablecoins are digital currencies that are backed by other assets to protect them from the volatility of normal cryptocurrencies and maintain their value.

They can move just like other cryptocurrencies on the blockchain but they are typically matched 1-1 with a real-life currency and backed with reserves of traditional assets like gold, fiat money, government-issued bonds, or in some cases other cryptocurrencies.

Source: RSK Developers Portal

A few examples are:

1. Tether Tokens: Tether, a blockchain-based company pioneered the stablecoin technology with their USDT, a stablecoin created to mirror US dollars. They also have other stablecoins each pegged 1-1 with matching Fiat money, e.g MXNT matched to the Mexican Peso, and EURT pegged to the euro. Every Tether stablecoin is propped by physical reserves

2. Terra UST is an algorithmic stablecoin pegged to the US dollar as well and backed by Bitcoins. Unfortunately, this particular stablecoin crashed and many attribute its failure to not being backed by proper funds. Read more about the crash here.

Now, To Elastic/Rebased Tokens.

An elastic or rebased token is also a type of algorithmic stablecoin except that it is uncollateralized. The name of this digital asset comes from its ability to change in supply or rebase regularly to maintain its price peg to whatever assets it is mirroring.

Typically, elastic assets seek to match their tokens to a specific price. To achieve this, the available supply of tokens increases (by minting) or reduces (by burning).

A practical example of this concept will bring clarity.

Ampleforth (AMPL) is the first and one of the foremost elastic tokens in the market. This coin rebases every 24 hours and is built to be equivalent to US dollars. When the price of AMPL becomes higher than the USD, more tokens are minted and added to token holders' wallets, this is a positive rebase. If the price drops, tokens are burned to create scarcity and maintain the AMPL's $1 peg.

The value of each token adjusts after each rebase such that a wallet may hold more tokens or less based on what kind of rebase occurs but the value of users' assets is not affected in any way.

Source: BeInCrypto

Stablecoins vs Rebased/Elastic Tokens; Differences and Similarities.

Stablecoins and rebased tokens are similar in the following ways:

• Stablecoins and rebased tokens are both digital assets that move on the blockchain.

• Both assets target another asset as a peg.

• They maintain a relatively steady price depending on the asset to which they are pegged

• And the two token types were created in other to create a stable alternative for regular cryptocurrencies.

The major difference between stablecoins and rebased tokens can be traced by examining how they go about maintaining their pegs.

Observe:

Stablecoins

Are collateralized. That means they have real-world traditional assets like fiat, gold, or government stocks in reserves.

Elastic/Rebased Tokens

Have no collateral backing them, they merely attempt to control the price by adjusting the supply of tokens available.

How to Determine Which Asset to Invest in.

As stated above, stablecoins and rebased tokens aim for the same goal to be equivalent to the price of another asset. They only differ in one major point which is how they achieve their peg.

Therefore in choosing between them you must consider their use cases and how they affect your financial goals and risk threshold.

Below is a table analyzing use cases and other aspects of both assets. It should help you figure out the answer to the question of which route to choose.

Final Thoughts.

Think of Stablecoins as the virtual equivalent of traditional banking institutions and Elastic tokens as cryptocurrencies that are stable.

Both are pegged to a price but one(stablecoin), is propped by reserves of real-world assets while the other (elastic tokens) algorithmically adjust supply to maintain its price peg.

Author: Gate.io Observer: M. Olatunji

Disclaimer:

* This article represents only the views of the observers and does not constitute any investment suggestions.

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