Rebase Tokens: What Are They & How Do They Work?
If you're interested in cryptocurrency, you've probably noticed that the price of many digital assets can be highly volatile. This can make it challenging to use cryptocurrency as a means of exchange or as a store of value. Rebase tokens, also known as elastic tokens, seek to offer a solution to this problem.
In this article, we'll explore what rebase tokens are, how they work, and whether or not they might be a good investment for you.
What Are Rebase/Elastic Tokens?
Rebase tokens are a type of cryptocurrency that adjusts their supply to maintain price stability. This is in contrast to traditional cryptocurrencies, which have a fixed supply determined at the time of their creation.
Rebase tokens achieve price stability through a process known as a "rebase," which is triggered at regular intervals (e.g., every 24 hours). During a rebase, the supply of the token is adjusted based on a predetermined formula.
For example, if the demand for a rebase token has increased by 10% since the last rebase, the supply of the token will automatically increase by 10%. If the demand for the token decreases, the supply will also decrease. This is meant to keep the price of the token stable even in the face of fluctuating demand.
How Do Rebase Tokens Work?
So, what is a rebase cryptocurrency, and how exactly do rebase tokens work in practice?
Let's take a closer look.
First, it's essential to understand that rebase tokens are built on smart contracts. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into its lines of code. Smart contracts further allow for the automation of specific processes, such as the adjustment of a token's supply in response to changes in demand.
When a rebase token is created, the smart contract is programmed with a predetermined formula for adjusting the supply. This formula is typically based on the token's target price and the current market price.
For example, if the market price of a rebase token is below the target price, the supply of the token will automatically decrease to bring the price back up to the initial target price. Conversely, if the market price is above the target price, the supply will increase.
The process of adjusting the supply is known as a "rebase." Rebases are typically triggered at regular intervals, such as every 24 hours. When a rebase occurs, the smart contract automatically executes the predetermined formula, adjusting the token’s supply as needed.
Examples of Rebase Tokens
There are several examples of rebase tokens currently in circulation. Let's take a look!
Ampleforth (AMPL) is a cryptocurrency that was one of the first to use an elastic supply, which means that the supply of tokens is automatically adjusted to maintain a stable price. In the case of Ampleforth, the target price is $1 per token. To achieve this, the supply is adjusted through a process called a "rebase," which occurs every 24 hours.
While Ampleforth aims to be a stablecoin, it can still be quite volatile. This is because the price of individual tokens is not the only factor to consider when evaluating the value of Ampleforth (or any other rebase crypto). Instead, it is essential to also consider the changes in supply that occur through rebasing.
One way to gauge the growth and traction of Ampleforth is to look at its market capitalization, rather than the price of individual tokens. Market capitalization is a measure of the total value of the network and can provide a more accurate picture of its overall performance.
Ampleforth gained significant traction through a liquidity mining campaign called Geyser, which distributes tokens to participants over a period of ten years. This demonstrates how liquidity incentives can drive adoption and growth for a decentralized finance (DeFi) project.
RMPL is a cryptocurrency forked from Ampleforth and uses a similar elastic supply mechanism. However, RMPL incorporates a randomized rebasing process and has a target price of $1. This means that the supply of RMPL tokens is adjusted randomly, rather than in response to specific price movements, to maintain stability.
The rebasing period for RMPL occurs over a maximum of 48 hours and is triggered when the price rises above $1.05 or falls below $0.95.
By using randomized rebasing, RMPL aims to prevent price-fixing and maintain a stable price for its tokens. It is designed to be a stable store of value for decentralized applications (dApps) and a medium of exchange for peer-to-peer transactions.
Yam Finance is a cryptocurrency that uses an elastic supply mechanism similar to Ampleforth’s. It also incorporates elements of staking and a fair launch. The goal of Yam is to maintain a stable price of $1 per token.
One unique aspect of Yam is that it is community-owned and was distributed through liquidity mining. This means there was no pre-mine or founder allocation, and all participants had an equal opportunity to acquire tokens through a yield farming scheme.
Despite being a relatively new and unknown project, Yam quickly gained traction and achieved $600 million in value locked in its staking pools within two days of its launch.
Unfortunately, a bug in the rebasing mechanism caused more supply to be minted than intended, leading to the need for a community-funded audit and a relaunch of the project on a new token contract. The future of Yam is now in the hands of its holders.
Merits and Demerits of Rebase Tokens
Just like any innovation, rebase tokens have some merits and demerits, some of which we highlight below.
Merits of Rebase Tokens
So, what are the potential benefits of using rebase tokens? Here are a few key points to consider.
- Price stability: The primary advantage of rebase tokens is their ability to maintain price stability. By automatically adjusting the supply in response to changes in demand, rebase tokens can keep their price relatively stable, even in volatile market conditions. This can be appealing to those who want to use cryptocurrency as a means of exchange or as a store of value.
- Decentralization: Rebase tokens are decentralized, meaning they are not controlled by any single entity. This makes them less vulnerable to manipulation and more resistant to censorship.
- Potential for increased adoption: By offering a stable price, rebase tokens could potentially be more appealing to merchants and consumers who are hesitant to use traditional cryptocurrencies due to their volatility. This could lead to increased adoption and use of rebase tokens, potentially driving up demand and value.
Demerits of Rebase Tokens
While rebase tokens have some potential benefits, they also have some drawbacks that should be considered.
- Complexity: Rebase tokens are complex, both in terms of their underlying technology and how they function. This can make them difficult for some users to understand and use.
- Volatility: Despite their aim to maintain price stability, rebase tokens are not immune to volatility. The price of rebase tokens can still fluctuate significantly, and there is no guarantee that they will be able to maintain a stable price over the long term.
- Risk of failure: As with any cryptocurrency, there is always a risk that a rebase token could fail. This could be due to various factors, such as technical issues, security vulnerabilities, or a lack of adoption.
Should Rebase Tokens Be In Your Crypto Portfolio?
As with any investment, it's essential to carefully consider the potential risks and rewards before investing in any cryptocurrency. While rebase tokens have some unique characteristics that could make them a compelling investment for some, it's also important to be aware of the potential risks.
One potential risk to consider is that rebase tokens are a relatively new and untested concept in the world of cryptocurrency. This means that there is a higher degree of uncertainty surrounding their long-term prospects, and it's possible that they could fail or not live up to their potential.
That being said, rebase tokens could potentially provide a valuable tool for traders and investors looking to hedge against the volatility of traditional cryptocurrencies.
In the end, whether or not rebase tokens should be in your portfolio or not will depend on your investment goals, risk tolerance, and overall investment strategy. As with any investment, it's essential to do your research and carefully consider all the potential risks and rewards before making a decision.