Rebase tokens, also known as elastic tokens, are a relatively new type of cryptocurrency that relies on an algorithmic mechanism to adjust the token supply in response to demand.
Read on to understand what rebase tokens are and how they work.
What Are Rebase Tokens?
A rebase token is a type of cryptocurrency that uses a smart contract-powered price stability mechanism that automatically adjusts the token’s supply at regular intervals in response to changes in demand.
The contraction and expansion of the token supply is called the rebase mechanism, which is where this type of cryptocurrency gets its name. The token’s target price (or price range) is maintained during the adjustment process. The adjustment occurs regularly, for example, every 24 hours.
How Do Rebase Tokens Work?
Rebase tokens are built on smart contracts, enabling rebase token creators to write the formula for token supply control in response to price changes and other rules in the token’s code.
Smart contracts allow for the automation of the price stabilization mechanism based on the rules determined at creation.
Many cryptocurrencies, such as Bitcoin (BTC), Litecoin (LTC), or Zcash (ZEC), have their supply determined at creation. Conversely, rebase tokens maintain stable prices by increasing and decreasing the number of tokens in circulation. Hence, they have no predetermined supply level.
If demand increases during a cycle and drives the price upwards, the subsequent rebase will increase the supply by an equal amount to maintain the price peg. If demand decreases, the smart contract will burn a proportional amount of tokens in the next rebase to decrease the supply.
For example, if the demand for a rebase token increases by 5% since the last rebase, its supply will automatically increase by 5% to ensure the token’s value remains stable.
Examples of Rebase Tokens
Rebase tokens are a relatively new phenomenon and a small niche market in the global crypto markets. Therefore, only a handful of rebase tokens with significant market capitalization exist. Two notable examples include Ampleforth (AMPL) and Olympus (OHM).
Ampleforth aims to be a stablecoin that uses an elastic supply to maintain its target price of $1. It achieves this by increasing the tokens in users’ wallets when the price is high and decreasing them when the price is low.
Token holders maintain a fixed percentage of their AMPL holdings, with the number of tokens changing every 24 hours depending on price fluctuations. The ERC-20 rebase token is available on various marketplaces, including Kucoin, Bitfinex, and Uniswap.
OHM aims to be Web3’s decentralized reserve currency by achieving price stability while keeping a supply and demand-driven market price. The value of OHM is backed by a treasury composed of DAI holdings to ensure that the price doesn’t drop below $1.
The OlympusDAO rebase mechanism is based on the “index” value, with the distribution and gOHM and sOHM being adjusted every 8 hours. Users stake their OHM tokens to earn rewards and gain eligibility within the network.
Other notable rebase tokens include KlimaDAO, Wonderland TIME, and TempleDAO.
Pros & Cons of Rebase Tokens
If you are considering adding rebase tokens to your digital asset portfolio or plan to deploy them in DeFi protocols to earn yield, there are several advantages and disadvantages that you should factor in when making that decision.
- Price stability: The idea behind rebase tokens is that they can – for the most part – maintain a stable value despite the volatile nature of the crypto industry.
- Profit potential: Price fluctuations between rebase cycles may potentially offer opportunities for profit generation.
- Innovation: The idea behind price stability without fiat currency reserves challenges the existing status quo and presents a potential solution for decentralized stablecoins in the future.
- Complexity: Average users may struggle to understand the rebase mechanisms, especially since each project takes a unique approach that involves rather complex concepts.
- Risk of mechanism failure: In addition to the complexity of elastic tokens, the risk of the rebase mechanism failing is a substantial drawback for the adoption of rebase tokens.
Rebase tokens can offer a degree of stability and the potential to generate investment returns. However, they are a relatively new digital asset that has yet to show that it can fulfill its intended purpose.