One of the key aspects of Bitcoin — the original cryptocurrency — was to create a digital asset whose supply could not be manipulated. Crypto enthusiasts speculate that one of the leading motivations behind Bitcoin’s creation was to offer a viable alternative to fiat currencies controlled by central banks, which were exposed during the 2008 global financial crisis for exploiting the system — only to be bailed out. Bitcoin’s key principles of trustless, peer-to-peer decentralization are completely antithetical to the traditional financial realm. Key to this is Bitcoin’s scarcity, which helps it to maintain its value. There will never be more than 21,000,000 Bitcoins.
When discussing the concept of “rebasing” tokens — let’s first digg into the concepts of supply and demand. The average economist will tell you that the law of supply and demand is the very foundation upon which an asset’s price is determined. The law traditionally states that, if all other factors remain equal, the higher the price of a good rises, the less people will demand that good. Parallel to this, if the price is higher — there will also be a higher quantity supplied — driving the price back down. Bitcoin is an interesting case, because over the time the supply of newly minted coins decreases — with emission rates “halving” every 4 years.
Understanding Market Cap
Many people fail to grasp this concept, and buy coins like Ripple (XRP) that have a much higher maximum supply (100,000,000,000 to be exact) — thinking that eventually the price will rise to match that of Bitcoin. The people who make such assumptions fail to understand that with a supply that is 4700x the supply of Bitcoin, it would require 4700x the demand of Bitcoin to achieve the same price point — something we can safely say will never happen.
A better metric to use when measuring the value of a cryptocurrency is actually its overall market cap. This metric takes into account both the price and supply of an asset, multiplying them together to get the total market value of all assets (assuming they could all be sold at the mark price). The equation looks like this:
Market Cap = Price x Supply
There are two types of Market Caps to discuss. There is the standard Market cap, which only takes into account the coins currently in circulation, and also the fully diluted market cap, which takes into account all the coins that will ever be in circulation. In other words, the standard market cap is:
Market Cap = Price x Circulating Supply
While the fully diluted market cap is:
Market Cap (Fully Diluted) = Price x Maximum Supply
In the case of Bitcoin, the current supply is about 18,600,000, while the Maximum Supply is 21,000,000 — a number that won’t be met until about 2140.
Some coins opt to have no maximum supply at all, choosing instead for a fixed emissions rate. Instead of capping (or tapering) the inflation rate, these coins seek to control the rate at which new coins are created, but will never actually stop minting them. One of these coins is Ethereum.
Decentralized Finance Innovations
While cryptocurrency itself is a form of decentralized finance in the broadest sense, the term DeFi is often used within the industry to refer to “on-chain” decentralized applications, powered by Smart Contracts — most commonly on the Ethereum platform. This crypto sub-industry has boomed in recent months, during which a number of groundbreaking ideas and innovations have been devised. These innovations have completely reshaped the way that the ecosystem operates, adding in new “wrapped” and “synthetic” assets, creating new types of non-custodial lending platforms, and building bridges to entirely other ecosystems and financial markets. Not the least of which, DeFi entrepreneurs have rethought the way we approach supply and demand!
Until now, cryptocurrencies have had a one-way supply, meaning that the supply only goes up until it reaches a maximum point. But what if the supply of a coin could be adjusted up or down — utilizing the laws of supply and demand in order to maintain a stable price? Coins that utilize such methods have an elastic supply, and are called Rebase tokens.
Elastic supply tokens work in such a way that the circulating supply expands or contracts to offset changes in a token’s price. The method through which these expansions and contractions take place is called Rebasing. The specific details of a rebase may vary slightly from project to project, but generally a Rebase occurs within your wallet itself. Your token balance will actually change within your wallet — up or down — generally without requiring any action at all from the holder!
One of the first projects to pioneer the elastic supply and rebasing concepts was Ampleforth. Its mission was to create the first non-custodial stablecoin, utilizing only the laws of supply and demand to peg its value to $1. This was in stark contrast to other stablecoins (such as USDC and USDT) which supposedly hold $1 in a vault for every token issued. Ampleforth on the other hand does not back the price of the token at all, but manipulates the circulating supply of its token — through rebasing — to maintain its price peg. When the price is over $1 — the supply of AMPL expands, assuming people will sell their excess and drive the price down. Likewise when the price is below $1, the supply of AMPL contracts — assuming people will buy and drive the price back to $1. In actuality, the AMPL project was only partially successful in achieving its goal.
AMPL/USD all time chart, taken from CoinGecko.
Above we have the price graph of AMPL. As you can see, the price has fluctuated wildly — ranging from $.22 in October of 2019 to $3.83 in July of 2020. If a true stablecoin like USDT fluctuated this much, we would say that it was broken. Nonetheless, we can say that AMPL has consistently ranged in value around the $1 mark, and always eventually returns to its peg. The lesson learned here is that Algorithmic stablecoins are much more volatile than their collateralized counterparts, and traders/holders must take that into account.
How Rebases Work
Now let’s get into the nitty-gritty of the underlying mechanics of Rebasing. We already know that Rebasing expands or contracts the supply of a coin at the time that it occurs, but what actually determines how much the supply expands or retracts?
Image taken from DeFiPrime.com
For most Rebase tokens, the expansion/contraction amount is not determined by the spot price at the moment of Rebase, but rather by the Time-Weighted-Average-Price (TWAP) over a 24 hour period. This approach prevents users from front-running the rebases, and serves to smooth out price fluctuations (relatively speaking). Most rebase tokens also utilize a system similar to what is depicted in the above chart. As long as the TWAP price remains within the white bounds, no supply expansion or contraction occurs. However, if the TWAP price deviates too high or low, a Rebase will occur at its given interval.
The last aspect of rebasing tokens that we will cover in this article is that they are non-dilutive — meaning that when a rebase occurs, a given user’s %-ownership of the Market Cap remains unchanged. For example, if a user owned 0.1% of the supply, they will still own 0.1% of the supply after the rebase. As such, rebase tokens can be thought of as shares of a Market Cap, rather than shares of a supply.
Introduction to DIGG
Until now, all other Rebase cryptocurrencies were pegged to a fixed value, such as $1. DIGG is the first-of-its-kind elastic-supply token to peg against a volatile asset — the value of BTC! That being said, DIGG is not a stablecoin, but rather is a non-custodial elastic BTC analog designed for use in the Ethereum-based DeFi ecosystem! Its price is intended to mimic BTC.
Most importantly, DIGG utilizes a non-dilutive and continuous rebase mechanism, ensuring transparency and fairness for all involved! If you own 1% of the DIGG supply, you will always own 1% of the DIGG supply regardless of supply changes — unless of course, you exit or change your position. DIGG rebases occur in all wallets — including smart contracts.
DIGG also operates with price bounds (valued in BTC) of 0.95 BTC and 1.05 BTC. If the TWAP price ranges between these values, no rebase will occur. In other words, if the price of DIGG is more than 1.05 BTC, the DIGG supply will increase in an effort to drive the price down, and if the price of DIGG is below 0.95 BTC, the supply will decrease in an effort to bring the price up.
If the TWAP price is outside of the specified thresholds, the Rebase mechanism does not try to bring the price to peg in only one occurrence. Instead, the mechanism seeks to “smooth” the price back to peg over a period of 10 rebases.
DIGG is completely community-owned and governed. The initial circulating supply of DIGG tokens was airdropped to Badger users, and had an initial total supply of 4,000 tokens and circulating supply of 600 DIGG (subject to rebase). Badger will support an initial liquidity mining program for DIGG that will last 22 weeks. For more information, check out this Medium post!
So what is bDIGG?
bDIGG is what you get when you stake your DIGG in the Digg vault in app.badger.finance. It represents your share in the vault of rebasing DIGG tokens, while allowing you to earn more DIGG in the process. While bDIGG does not rebase, it still allows you to claim your % of the bDIGG vault. Through this innovation, many more DeFi applications become enabled to work with DIGG in a composable manner through bDIGG; a first for elastic supply tokens!
Coming Soon: a new Badger Sett vault will be in the works for rewarding adherence to supply & demand. This will involve diversification between WBTC and DIGG, and automate the buying & selling of DIGG to keep the peg above the price of Bitcoin consistently. More details to come in the coming weeks.