Rebase Token brings opportunities but also comes with many risks, from the complexity of the mechanism to high price volatility. Let’s learn about Rebase Token – also known as Elastic Supply token.
What is a Rebase Token?
A rebase token is a type of token that has an automatic supply adjustment mechanism (rebase mechanism) to maintain price stability or achieve a specific target price. Instead of having a fixed supply like most tokens, a rebase token changes its total supply based on market conditions, but without affecting the percentage ownership of investors.
Examples of Rebase Tokens:
- stETH
- aUSDC
- variableDebtUSDC
- sKLIMA
- AMPL
How Rebase Tokens Work
Rebase tokens operate on a mechanism that automatically adjusts the token supply to maintain or bring the token price back to a target price. This mechanism doesn’t change the investor’s percentage ownership of the total supply; it simply adjusts the number of tokens in their wallet to reflect the overall supply change. This process has two main directions:
Positive Rebase (Supply Expansion)
Positive rebase is triggered when the market price of the token exceeds the target price, for example, $1. In this case, to bring the price closer to the target, the system automatically issues new tokens, increasing the total supply.
These new tokens are distributed proportionally to existing wallets based on their previous holdings. This ensures that even though the number of tokens in an investor’s wallet increases, their ownership percentage relative to the total supply remains the same.
The result of expanding the supply is that the token price decreases, moving closer to the target price. This helps stabilize the market and reduce the pressure of excessive price increases.
For the AMPL token, if the price exceeds $1, a rebase process occurs daily to issue new tokens until the price returns to near $1. This mechanism creates a balance between supply and demand, keeping the token stable within the ecosystem.
Negative Rebase (Supply Contraction)
Negative rebase is activated when the market price of the token falls below the target price, for example, $1. To restore the price closer to the target, the system automatically reduces the total supply by adjusting the number of tokens in investor wallets.
The number of tokens in each wallet decreases proportionally to the supply contraction, but the investor’s ownership percentage relative to the total supply remains unchanged. This increases the value of each remaining token, creating upward price pressure and bringing the price back towards the target.
If the price of the AMPL token falls below $1, the rebase mechanism will operate daily to reduce the supply until the price reaches a more stable equilibrium within the ecosystem.
Benefits of Rebase Tokens
Rebase Tokens offer many unique benefits, especially in stabilizing value and controlling supply, making them an innovative solution in the cryptocurrency ecosystem.
One of the critical goals of Rebase Tokens is to maintain a stable value close to the target price, which is usually pegged to a reference asset such as the USD. The rebase mechanism helps reduce price volatility in the market, providing stability for investors and decentralized finance (DeFi) applications. This is especially important for DeFi protocols that require assets with stable value as collateral or a medium of exchange.
The Rebase Token mechanism incentivizes long-term holding rather than short-term trading. Although the number of tokens in an investor’s wallet may change over time due to rebasing, their ownership percentage of the total supply remains the same. This helps protect investors’ interests and reduces selling pressure, thereby supporting the sustainable development of the project.
Rebase Tokens are well-suited for DeFi applications due to their ability to adjust supply to maintain price stability. They can be used as collateral, a medium of exchange, or a store of value in DeFi protocols. These features help expand the applicability of Rebase Tokens, benefiting both investors and financial ecosystems.
Rebase Tokens provide a new approach to controlling inflation and creating a balance between supply and demand in the market. By adjusting the total supply, the project can ensure that the token’s value is not affected by major market changes, thereby creating a stable and sustainable economic ecosystem.
Risks of Rebase Tokens
Rebase Tokens use an elastic supply mechanism, adjusting the total supply based on market conditions. However, this mechanism is quite complex and difficult to understand for many investors, especially those new to the crypto market. The constant change in the number of tokens in their wallets can be confusing, leading to wrong investment decisions.
Although the goal of Rebase Tokens is price stability, the market price is still heavily influenced by investor sentiment and external factors such as speculation or market volatility. For example, even when the rebase mechanism is working, the token price can be pushed too high or too low before reaching equilibrium.
Shrinking the supply can cause confusion for investors as the number of tokens in their wallets decreases, even though their ownership percentage remains the same. This often leads to a loss of confidence from retail investors who tend to focus on the number of tokens rather than the actual value.
Rebase Tokens are often not suitable for long-term investment strategies because the value and number of tokens are constantly changing. In cases where there is no clear target price or the project fails to maintain trust from the community, the token can quickly lose value.
Learn more: Circulating supply of tokens in Crypto.
