Knowing rebase tokens

Rebase tokens often called elastic tokens, are cryptocurrencies whose supply is algorithmically adjusted to control their price. Like stablecoins, rebase tokens are pegged to another asset. However, rebase tokens automatically burn existing tokens or mint new ones instead of using reserves.

Despite its high volatility, the price of a rebase token tends to remain steady depending on the asset it tracks. Rebase tokens get price stability through a regular “rebase,” which is triggered at regular intervals (e.g., every 24 hours). In a rebase, the supply of the token is adjusted based on a set formula.

Take for instance, if the demand for a rebase token has increased by 20% since the last rebase, the supply of the token will automatically increase by 20%. If the demand for the token decreases, the supply will also decrease.

Moreover, consumers may find it difficult to understand rebase token structures due to their complexity. Investors interested in rebasing tokens should take caution due to the possibility of large price swings and a detailed understanding of the token’s characteristics is a mandate.

How do these token work?

The supply of rebase tokens is elastic. In other words, supply is directly proportional to supply and demand without changing its value in users’ wallets. To put it another way, the amount of tokens in the wallets will increase or decrease accordingly. However, the total wallet value stays the same.

As mentioned before, the entire mechanism follows a predetermined routine. Suppose the rebase mechanism is set to a 24-hour interval with a $1 target price, and the circulating supply increases once the price passes it. Thus, that token’s value drops.

A rebase token whose value doubles from $1 to $2 will lead to an increase in supply during the rebase period. As the token supply increases, the price goes back down to $1.

How do rebase tokens differ from traditional tokens?

The rebase token deviates from conventional fixed-supply tokens by adjusting their overall supply dynamically.

In contrast to traditional tokens, rebase tokens use an elastic supply mechanism to adjust the amount in circulation based on market conditions, maintain price stability, or stick to a target price.

By using smart contracts, rebase tokens adjust each holder’s balance automatically to maintain their proportionate share of the total supply regardless of volatility, unlike traditional tokens, whose supply changes are manual.

Rebase tokens are frequently and algorithmically modified to control inflation, encourage participation, and lessen volatility by using cutting-edge techniques to stabilize token values or achieve predetermined goals.

How are these token different from stablecoins?

In many ways, stablecoins and rebase tokens differ. Stablecoins have an equivalent value to a single US dollar. Examples include USDT, USD, etc. Rebase tokens, on the other hand, are different from stablecoins in many ways. For one, Rebase tokens are ones whose prices are adjusted algorithmically.

You can think of stablecoins as digital crypto assets tied to real-world assets like the US dollar($). Trading got easier and more interesting with stablecoins. Coins like Tether and USD coins are stablecoins, and they are the ones with the highest MC (market capitalization) in the crypto market today.

These tokens are a crypto asset whose price is controlled by algorithmically adjusting supply. Most of these coins are inflationary and not pegged to anything. To increase scarcity and beat inflation, these tokens schedule token burns that automatically deplete their circulation. A daily automatic supply adjustment process (AMPL) can easily let you know if a coin is elastic.

Do these token make money?

A rise in the token price can make investors’ rebase holdings go up substantially. So, when the supply adjusts, they get both the higher price and the more tokens. Yet, for rebase tokens to be profitable, an expansion within the protocol’s treasury must exist. Whenever an increase isn’t backed up by a significant increase in the Treasury, it can lead to a dilution.

Rebase tokens you should know about

As of late March 2024, the rebase tokens’ market capitalization is $521 million, with a 24-hour trading volume of $4.7 million. The largest gainer is Base Protocol, while the one that is trending the most is KlimaDAO. Below are a few of the most popular rebase tokens in circulation.

Ampleforth (AMPL)

Ampleforth (AMPL) was one of the first tokens to use elastic supply. It runs on Ethereum using the Chainlink software. To keep the price at this level, the supply of tokens is adjusted every 24 hours. Thus, if AMPL’s price goes up by a few cents, extra tokens are reflected in user wallets proportionally to their holdings. In terms of commodity asset class properties, Ampleforth is similar to Bitcoin but its rebase mechanism makes it different.

Base protocol (BASE)

The Base Protocol (BASE) is a unique token that mirrors the total market cap of all cryptocurrencies at a 1:1 ratio. This lets users observe the whole crypto industry with a single token. Built on the Ethereum blockchain, BASE integrates a Chainlink oracle. In order to achieve price equilibrium, the token’s price is designed to be elastic, expanding or contracting programmatically. As a result of using total market capitalization of all cryptocurrencies, BASE can provide a forecast of crypto market direction and health.

Olympus (OHM)

Olympus (OHM) is a reserve currency protocol governed by a decentralized autonomous organization (DAO). OHM is the Olympus platform token. A basket of assets like FRAX and DAI backs each OHM token in the Olympus treasury. There’s a claim that this gives OHM tokens intrinsic value. Now, DAOs are a system for making decisions more collaborative and trustless.

Initially, Shiba Inu’s dogekiller (LEASH) token was released as a rebase token. It tracked the price of dogecoin (DOGE) at a ratio of 1/1000th, in other words, if dogecoin was $0.50, Doge Killer’s token price would be $500. By doing this, Shiba Inu investors could benefit from dogecoin price movements without having to invest directly in the token, bringing in more users.

Benefits of these tokens

Rebase tokens mitigate volatility and improve cryptocurrency transactions’ reliability by automating price stability, decentralization, and efficiency.

For uses like payments, loans and trading, price stability is essential and rebase tokens offer a unique way to do it. Unlike traditional stablecoins, rebase tokens dynamically modify their token supply to offset market volatility and maintain their value.

By reducing the risk associated with price swings, rebase tokens can be more reliable mediums of exchange and stores of value. Also, rebase tokens are usually decentralized, so they resist censorship and don’t have single points of failure.

The automated nature of the rebase mechanism simplifies price stability maintenance by eliminating the need for centralized control and manual intervention.

Risks and concerns

Rebase tokens come with risks that potential users should consider carefully. These risks include price instability, user confusion, smart contract flaws and regulatory uncertainty.

The supply of these tokens is modified by intricate algorithms. In which case, smart contracts may have weaknesses or vulnerabilities that could result in unexpected events or losses for tokenholders.

Due to the automated nature of rebase procedures, price stability isn’t guaranteed, and severe market conditions can cause major deviations from the intended value. Also, users who don’t understand how rebase tokens work might be confused, which could lead to lack of adoption or confidence.

There are legislative uncertainties surrounding rebase tokens and their compliance with current laws and regulations, so users and projects may be exposed to legal concerns.