By EeFi Richard and Loki_VT
Practical problems
The supply of elastic-supply tokens (also known as rebase tokens) are constantly changing, which makes it difficult for decentralized exchanges (DEX) and the AMM mechanism to operate. For instance, Uniswap launches apples and bananas. 50 apples (a) and 50 bananas (b) are invested in the liquidity pool. Anyone can exchange apples for bananas, or bananas for apples. Suppose that the exchange rate between apples and bananas in the primary market is exactly 1:1. There are 50 apples and 50 bananas in the Uniswap liquidity pool, so a * b = 2500. For any transaction, Uniswap needs to ensure that the multiplication of the number of apples and bananas in the pool equals 2500. Otherwise, the transaction price will be wrong (x * y = k where k is always constant).
A handsome dude comes to buy an apple. How many bananas should he pay? If he buys an apple, there will be 49 apples left in the pool, and 49 * b still needs to be equal to 2500. So the total number of bananas b is equal to 51.02. Since there are already 50 bananas in the pool, we still need 1.02 bananas (assuming that the purchase quantity of decimals is allowed). Therefore, the quotation for a handsome dude to buy an apple is: 1.02 bananas.
This is the very simplistic math behind the AMM mechanism. The liquidity pool storing apples and bananas is an analogy for the liquidity pool of the DEX, and the DEX is the exchange running on the blockchain network. So under the same logic, how will the DEX perform if a token exhibits elastic-supply dynamics, like AMPL? Owners of elastic-supply tokens would hope that the price of AMPL on exchange will not change due to rebase (supply change event) and only change due to a transaction.
Pool balances before rebase in the inflation state of 10%:
10000 AMPL / 10000 USDC, 1 AMPL equals 1 USDC
Pool balances after rebase in the inflation state of 10%:
11000 AMPL / 10000 USDC, 1 AMPL equals 0.9 USDC
Pool balances before rebase in the deflation state of 10%:
10000 AMPL / 10000 USDC, 1 AMPL equals 1 USDC
Pool balances after rebase in the deflation state of 10%:
9000 AMPL / 10000 USDC, 1 AMPL equals 1.1 USDC
It can be seen from the above that due to the AMM mechanism, the unit price in the exchange is erroneous. In the case of no transaction, the price of AMPL changes due to the supply change, which is problematic. It is the very feature of elastic currency that makes it difficult to trade on DEXs.
What can ElasticSwap do?
ElasticSwap(elasticswap.org) is the first DEX specialized in elastic supply tokens, which provides corresponding Liquidity Pools and staking opportunities. Let’s continue with the above example to see how ElasticSwap works when AMPL rebases. Once again, we hope to see that the price of AMPL on exchange will not change due to rebase (supply change event) and only change due to a transaction.
Pool balances before rebase in the inflation state of 10%:
10000 AMPL / 10000 USDC, 1 AMPL equals 1 USDC
Pool balances after rebase in the inflation state of 10%:
10000 AMPL / 10000 USDC, 1 AMPL equals 1 USDC
Pool balances before rebase in the deflation state of 10%:
10000 AMPL / 10000 USDC, 1 AMPL equals 1 USDC
Pool balances after rebase in the deflation state of 10%:
9000 AMPL / 10000 USDC, 1 AMPL equals 1 USDC
As can be seen above, the price of AMPL will not change due to deflation and inflation (a rebase) and will only change in the event of a transaction. ElasticSwap optimizes the AMM exchange logic and eliminates unit price errors by introducing a decay variant and delaying the formula of a * b = 2500 (please refer to the example of apples and bananas).
More about decay:
In addition to solving the existing transaction problems, ElasticSwap has established partnerships with Ampleforth and ShapeShift DAO respectively, providing a variety of transaction pairs on Ethereum and Avalanche, including AMPL, FOXy, FOX, etc.
Growing Style Staking
ElasticSwap’s staking model is also very unique. In order to encourage liquidity, many DEXs will provide incentive staking pools for liquidity providers. So, liquidity providers can enjoy their share of transaction fees and earn staking rewards. ElasticSwap is no exception.
The ElasticSwap LP (ELP) Staking Pools works like a hybrid between a -ve and -x staking contract. Simply put, when liquidity providers stake tokens in the Staking Pools, they will be given corresponding TIC rewards (Unrealized Rewards) every second. TIC is the native token of the ElasticSwap platform. As the platform accrues fees, fees are converted to USDC and paired with the unrealized TIC rewards, and are then claimable. In practice, rewards are claimable as ELP tokens (Claimable Rewards). ELP rewards present an interesting opportunity… you can sell the ELP token, unwrap for TIC and USDC and keep the USDC and restake the TIC, or stake the LP token.
There are three advantages in this staking model: 1. Bind staking and the growth of the platform together. The more transactions, the more fees will be generated on the platform. The more fees, the more staking rewards will be distributed. 2. The exchange process can effectively promote the depth of trading pairs. 3. Sell pressure, as rewards are claimed, is removed since there are multiple options for stakers.
More about staking:
Perhaps the most important protocol/tool in DeFi is the DEX. The most important role a DEX plays is providing liquidity for trading pairs, and when working efficiently, all trading pairs. Elastic-supply tokens have not seen the same uptake given the lack of infrastructure and the inefficiency of trading pairs on traditional AMMs. ElasticSwap solves that. Not only have they provided a platform to more efficiently trade elastic-supply tokens, they have a unique staking model that doubles the rewards for providing liquidity, they have also integrated with some of the largest aggregators, like 1inch. With the rise of Elastic Finance, ElasticSwap will cooperate with more elastic projects across chains to provide diversified trading pairs and staking opportunities. The future is elasTIC!