What Is a Rebase Token

What is a rebase token, and what is its role in the crypto world? Rebase tokens, or elastic tokens, are similar to stablecoins in the sense that they’re both pegged to another asset. However, rebasing tokens maintain price stability in a different way. Unlike traditional tokens, they use an elastic supply mechanism to keep the prices stable.

If you want to learn more about rebase crypto tokens and their main benefits and downsides, keep reading.

What Are Rebase Tokens

A rebasing token is a digital currency with an algorithmically adjusted supply that controls its price. These tokens are similar to stablecoins, as they’re also pegged to other assets. However, they don’t use reserves to keep their prices stable. Instead, they use the elastic supply mechanism to keep the prices stable. This is why they’re also known as elastic tokens.

Elastic tokens are less volatile than traditional cryptos, like BTC and ETH, whose value is based on demand and supply. This is because they maintain their price by adjusting their supply.

These types of tokens have many uses. They can be designed to distribute rewards, as is the case with the Rebasefy crypto protocol and Olympus DAO, or used as collateral for loans. They can also be used in the DeFi sector as governance tokens.

Now that you know what a rebase token is, here’s how its mechanism works.

How Do Rebase Tokens Work?

Rebase tokens are controlled by smart contracts that automatically reduce or expand the number of tokens in circulation to maintain their value. This process is called the rebase mechanism. This mechanism is triggered at a predetermined time, usually every 24 hours or every week.

If the price exceeds the target value, a portion of circulating tokens will be automatically burned. This is known as a negative rebase. On the other hand, if the price falls below the target value, new tokens will be minted automatically. This is known as a positive rebase.

Rebase Cycle

As mentioned above, the rebase mechanism works on a predetermined schedule that can be triggered on a daily or weekly basis. Price thresholds can also trigger it.

During each rebase cycle, the token’s supply will adjust to the price difference so that its value follows its intended price. This creates a balance between sellers and buyers, which brings the token’s price closer to its target value.

Rebase cycles also ensure proportional and, above all, fair distribution of supply changes. For example, if the total supply jumps by 2%, the balance of all token holders will go up by 2%.

These cycles make rebase tokens a more stable investment than traditional digital currencies.

Pros and Cons of Rebase Tokens

Now that you’ve learned what rebasing means in the crypto world and how it works, let’s discuss its main advantages and disadvantages.

Potential Benefits of Using Rebase Tokens

Price stability. The biggest benefit of these types of tokens is their ability to stabilize prices. This makes them a more reliable option for making payments and taking loans, and it’s why they are often used in the DeFi sector.
Decentralization. Rebase tokens are decentralized, which makes them immune to market manipulations.
Increased adoption. Elastic tokens have many use cases, which is why more individuals and companies have started using them. They can also foster active community engagement and act as governance tokens.

Potential Cons of Using Rebase Tokens

Volatility. Although the main goal of elastic tokens is to maintain price stability, they can also experience volatility. This can happen during extreme market conditions and rebasing cycles. For example, expanding the token supply or minting new coins can lead to a decrease in the token’s value.
Risk of failure. Rebase tokens are, like all cryptocurrencies, prone to technical issues and security hacks. On top of that, the rebase mechanism will not always perform at the highest level.
Complexity. Elastic tokens have a very complex structure since their mechanism uses sophisticated algorithms. This means that average users might have problems understanding how they work.

Rebase Token Taxes

In theory, buying elastic tokens with fiat is not a taxable event, as is the case with buying cryptocurrencies. However, buying rebase tokens with crypto is taxable in the US, UK, Canada, and Australia. You’ll also have to pay tax on rebase rewards. This tax will be based on the fair market value of the reward and the fiat currency you use.

Examples of Rebase Tokens

The most notable examples of rebase tokens include Ampleforth, YAM Finance, and RMPL.

Ampleforth

Ampleforth (AMPL) is a rebase token that maintains its target price of 1 CPI-adjusted dollar via the elastic supply mechanism. It aims to keep its value close to $1 by increasing the token supply when the price exceeds its target value and vice versa. Its rebase cycle is triggered every 24 hours. This means that the price of AMPL tokens will automatically increase or decrease every 24 hours.

For example, if the price of AMPL jumps by a few cents, all wallets holding AMPL tokens will lose a portion of their holdings, preventing the price from exceeding $1. The same rule applies when the price of AMPL goes down.

YAM Finance

Yam Finance (YAM) is a project that combines the rebase mechanism with DeFi yield farming. YAM aims to maintain its target price of $1. Its rebase cycles are triggered every 12 hours. If the price of the YAM token exceeds its $1 target, its supply will rise, which will also lower its cost. On the other hand, if its price falls below $1, its supply will decrease, contributing to its price increase.

In addition, investors will be able to earn YAM tokens by providing liquidity to the yUSD/YAM Uniswap pool. If YAM experiences a positive rebase, its protocol will create an additional 10% of YAM tokens that will go to the yUSD/YAM pool.

RMPL

RMPL is a DeFi protocol that uses the elastic supply mechanism to maintain its target price of 1 CPI-adjusted dollar. RMPF is also a fork of Amplefort, which means that they have a similar code. However, this token doesn’t use a fixed but randomized rebasing mechanism. In other words, its supply is not based on price movements but is adjusted randomly.

RMPL rebasing cycle is triggered every 48 hours. This token is tailored to be a medium of exchange on P2P platforms and a stable store of value for dApps.

Conclusion

Now that you understand what a rebase token is, if you plan to invest in this digital asset, make sure to consider its main benefits and downsides. Remember that these tokens have only recently landed in the crypto world, meaning they have yet to prove their potential.

However, some crypto analysts believe elastic tokens could shape the DeFi system. Why? Because they are more stable than traditional cryptocurrencies and can be used as collateral for loans.