Understand rebased tokens in one article: definition, operating mechanism and limitations

Original title: “What is Rebase Token”

Original source: TokenInsight

Definition of rebased token

Rebase Token, also known as Elastic Token or Elastic Supply Token, is a special cryptocurrency. This type of token has a common feature - “Rebase Mechanism”, that is, the circulating supply of the token will be automatically and dynamically adjusted according to the fluctuation of the token price (or the price of the linked asset). . This mechanism is implemented through the token’s smart contract and stabilizes the actual value of the user’s holdings by maintaining a certain ratio between the user’s holdings and the total supply.

Operating mechanism of rebased tokens

Different rebased tokens have different elastic supply mechanism designs, but overall they all follow the same logic: reduce supply when currency prices fall, and increase supply when prices rise.

Take Ampleforth for example.

Ampleforth (AMPL) is a decentralized stablecoin project on Ethereum and one of the first projects to apply the rebase mechanism. The circulating supply of AMPL tokens is adjusted - or rebase - every 24 hours, with the goal of keeping the price at $1.

Just like currency issuance will dilute asset prices, when the price of AMPL exceeds $1, the circulating supply will expand during the Rebase period, thereby reducing the value of each AMPL token; and if the price of AMPL drops below $1, The supply will then decrease during the rebase, thereby increasing the value of each token.

The results of the rebase will be propagated to all Ampleforth wallets, and their wallet balances will be adjusted proportionally.

It is worth noting that AMPL holders hold “a fixed proportion of the total circulating supply of AMPL” rather than a fixed amount of AMPL. Therefore, AMPL holders will retain the same proportion of the token supply regardless of rebase. From the perspective of the holder, the amount of AMPL in his wallet will change every 24 hours. However, due to the rebasing mechanism, the total value of his AMPL wallet has not changed.

Let’s take a simple example to understand further:

Assume that there are currently 100 AMPL in circulation and you have 10 in your wallet, which means you hold 10% of the total circulation. Imagine that when market demand suddenly increases in a short period of time, AMPL becomes in short supply in the market, and we can assume that its price doubles from $1 to $2. In this case, the network will increase the supply of 100 AMPL during the next rebase, and the number of AMPL in your wallet will also change from 10 to (100+ 100)* 10% = 20 at this time, but your position The actual value theoretically does not change.

While most cryptocurrencies have changes in circulating supply, they are fundamentally different from rebased tokens. For example, the circulating supply of Bitcoin is predetermined through a fixed algorithm, while the changes in the circulating supply of rebased tokens are dynamically adjusted based on market prices.

Regarding the circulation of Bitcoin, for more information, please refer to the entry: What is Bitcoin Halving

Meme coin project Shiba Inu also once wanted to get involved in the field of rebasing tokens. The project once released LEASH as a rebased token, anchoring the price of Dogecoin (DOGE) at a ratio of 1/1000. Specifically, if the price of Dogecoin is $0.50, the price of LEASH will be $500. This means that participants in the SHIB ecosystem can benefit from the price changes of Dogecoin through LEASH without directly investing in Dogecoin, thereby attracting more users to join the ecosystem.

The SHIB team finally decided to abandon the rebasing token attribute of LEASH, and the vampire Dogecoin plan also declared bankruptcy. For more information about the SHIB ecosystem, please refer to: What is Shiba Inu. (SHIB) - Memecoin that strives to get rid of the Meme label

At present, there are still relatively few participants in the field of rebased tokens. Except for LEASH, which gave up midway, some of the leading rebased tokens such as Base Protocol’s BASE and Yam Finance’s YAM are also not optimistic about their development - why?

Limitations of rebased tokens

For users, the main benefit of holding rebased tokens is the stability of value in a highly volatile crypto market. This is a property similar to stablecoins that is attractive to people who need cryptocurrencies as a means of exchange and a store of value.

It seems very attractive, but from another perspective, since the pursuit of value stability, why don’t users just choose USDT?

LEASH appears to offer another benefit of holding a rebased token: indirect access to the gains generated by the price movement of another asset.

Let’s not talk about which of the two meme coins, SHIB or DOGE, is more liquid and has a wider audience - since they want the income of Dogecoin, why don’t users just buy Dogecoin directly?

All in all, the biggest limitation of the rebased token is that it uses a seemingly ingenious new method to provide an option that users do not need. And because of its “originality”, it is less user-friendly and approachable in terms of conceptual understanding, further limiting its own development.