All You Need to Know About Rebase Tokens

Over the years, cryptocurrencies have proven to be a good alternative to money, however, their inability to retain value has been a major concern to many people. While they have thrived as a good investment tool and have created a fortune path for many, cryptocurrencies are not always a good option for those looking to use them as a store of value. If you have ever wondered if and how this challenge has been addressed, the answer is “yes”. The crypto space now harbours tokens that retain value no matter the condition of the market, all thanks to the advent of rebase tokens.

Unlike any other cryptocurrency, these tokens are designed in a way that they can adjust their circulating supply to ensure the price of the token is not influenced. Let us help you understand all you need to know about rebase tokens as we delve further.

Rebase Tokens Defined

Rebase tokens, also known as elastic tokens, are a type of cryptocurrency that automatically controls and changes their circulating supply to keep their value steady. Unlike regular cryptocurrencies, rebase tokens don’t have a fixed supply. Instead, they use a “rebase mechanism” to automatically adjust the amount of tokens in circulation based on a set formula at regular intervals.

This feature makes them elastic and non-dilutive, filling a gap in the market for cryptocurrencies that can stay stable without needing a reserve. The main goal of rebase tokens is to create a cryptocurrency with a flexible supply that doesn’t lose value over time, addressing a problem seen in both Bitcoin (BTC) and U.S. dollars.

This unique characteristic makes rebase tokens potentially valuable for decentralized finance (DeFi) protocols, offering a more reliable source of collateral compared to the unpredictable liquidity provided by various market participants.

How Do Rebase Tokens Work?

To understand how rebase tokens work, it is important to have an idea about smart contracts. Rebase tokens operate through the use of smart contracts, which are self-executing contracts with predefined terms encoded directly into their lines of code. These smart contracts enable the automation of specific actions, such as adjusting the token’s supply based on changes in demand.

Notably, if the market price falls below the target price, the token’s supply automatically decreases to restore the price to its initial target. Conversely, if the market price surpasses the target, the supply expands. This supply adjustment process is termed a “rebase,” and it’s typically scheduled to occur at regular intervals. During a rebase, the smart contract autonomously executes the predetermined formula, modifying the token’s supply accordingly.

Rebase Taxes

Rebase taxes, a unique tax system tailored for rebase tokens, play a crucial role in orchestrating various transactions, acting as the regulatory maestro for the stability of these tokens.

The acquisition tax takes centre stage during the purchase of rebase tokens, calculated as a percentage of the transaction value and gracefully subtracted from the buyer’s funds. This tax choreographs a dance against abrupt price swings and deters excessive purchases, ensuring a harmonious equilibrium in token supply.

Likewise, a sales or unwrapping tax takes its cue when rebase tokens find their way to the market. This tax pirouettes onto the seller’s or unpacker’s stage, gracefully deducted from their transaction value. Its purpose is to shield against sudden supply crescendos resulting from extensive sales or unpackings.

With the strategic implementation of sales or unpacking taxes, rebase tokens command their supply dynamics, fostering a more poised and stable token ecosystem.

Adding to the symphony, rebase tokens often participate in swap transactions within decentralized exchanges, where a swap tax takes the spotlight. Imposing its finesse on the transaction value, this tax orchestrates liquidity management, gracefully sidestepping potential market manipulation risks.

Rebase Tokens: Examples

A prime example of a rebase token can be Ampleforth (AMPL). Ampleforth is a rebase token designed to be an uncollateralized synthetic commodity. It employs a unique protocol to automatically adjust its supply in response to market conditions. If the price is above the target, the supply increases, and if it’s below, the supply decreases. This adjustment occurs regularly, typically every 24 hours, aiming to maintain a target price of USD 1.00.

Another example is Olympus (OHM). This rebate token is designed to be a stable decentralized currency in Web3. It maintains a steady value by adjusting to changes in supply and demand. The value of OHM is secured by a treasury holding DAI to ensure it stays above $1.OlympusDAO uses a mechanism called “rebase” to adjust elements like gOHM and sOHM every 8 hours. Users can stake their OHM tokens to earn rewards and network participation.

Other notable players in the rebase token game include KlimaDAO, Wonderland TIME, and TempleDAO. They each have their unique approach, contributing to the diversity of the crypto landscape.

Pros & Cons of Rebase Tokens

The key advantages of adhering to rebase tokens include the following:

• Steady value. Rebase tokens maintain price stability by adjusting supply based on demand, ensuring resilience in turbulent markets.
• Decentralization. Being decentralized makes rebase tokens less susceptible to manipulation and more resilient against censorship attempts.
• Growth opportunities. The stability attracts merchants and consumers, potentially increasing adoption and driving up demand.

Meanwhile, there are also a few downsides to bear in mind:

• Volatility risk. Despite efforts for stability, rebase tokens can still experience fluctuations due to constant supply adjustments.
• Risk of Failure: Vulnerabilities, technical issues, and low adoption pose risks to the success of rebase tokens
• Complexity. The underlying technology may be challenging for less experienced users, given its relatively new nature in the crypto space.

Final Thoughts

When thinking about investing in any cryptocurrency, like rebase tokens, it’s important to weigh the risks and rewards. Rebase tokens are a bit like uncharted territory in the crypto world – they’re new, and we’re not sure how they’ll perform in the long run. There’s a chance they could succeed, but they might also fall short of expectations.

Despite the uncertainty, some see rebase tokens as a way to deal with the ups and downs of regular cryptocurrencies. They could be like a safety net for traders and investors.

Deciding whether to add rebase tokens to your investments boils down to your goals, how much risk you’re comfortable with, and your overall strategy.