What is Rebase Token

Definition of Rebase Token

A Rebase Token, also known as an Elastic Token or Elastic Supply Token, is a unique type of cryptocurrency. These tokens share a common feature: the "Rebase Mechanism." This means that the circulating supply of the token is automatically adjusted based on the fluctuation of the token's price (or the price of the asset to which it's pegged). This mechanism is achieved through the token's smart contract, ensuring that a user's holdings maintain a consistent value relative to the total supply.

How Rebase Tokens Work

Different rebase tokens have varying elastic supply mechanisms, but they generally follow the same principle: reduce the supply when the price falls and increase the supply when the price rises.

Take Ampleforth (AMPL) as an example.

AMPL is a decentralized stablecoin project on Ethereum and one of the earliest to implement the Rebase mechanism. The circulating supply of AMPL tokens adjusts every 24 hours – this is what's known as a Rebase – with the aim of maintaining its price at $1.

Similar to how money printing can dilute asset prices, if the AMPL price exceeds $1, the circulating supply will expand during the Rebase period, subsequently reducing the value of each AMPL token. Conversely, if the AMPL price falls below $1, the supply will contract during the Rebase, thereby increasing the value of each token.

The results of the Rebase are propagated to all Ampleforth wallets, and their balances adjust proportionally.

Note that AMPL holders retain a fixed percentage of the total circulating supply, not a fixed number of AMPLs. Thus, the number of AMPLs in a holder's wallet changes every 24 hours due to the rebase, but the total value remains the same.

To further understand, let's simplify with an example:

Imagine there are currently 100 AMPL tokens in circulation, and you have 10 of them in your wallet, which means you hold 10% of the total circulating supply. Now, picture a scenario where, in a short period, the market demand for AMPL suddenly increases. AMPL becomes scarce, and let's assume its price doubles, going from $1 to $2. In this situation, during the next Rebase, the network will add an additional 100 AMPL to the supply. Consequently, the number of AMPLs in your wallet will adjust from 10 tokens to (100+100)×10(100+100)×10 = 20 tokens. However, the actual value of your holdings, in theory, remains unchanged.

While many cryptocurrencies have varying supplies, rebase tokens are fundamentally different because their supply adjusts dynamically based on market price.

For more information on Bitcoin's circulating supply, please refer to the entry: What is Bitcoin Halving

The memecoin project Shiba Inu also once ventured into the rebase token arena. They launched LEASH as a rebase token pegged to Dogecoin's (DOGE) price at a 1/1000 ratio. To be specific, if the price of Dogecoin is $0.50, then the price of LEASH would be $500. This means that participants in the SHIB ecosystem can benefit from the price fluctuations of Dogecoin through LEASH without directly investing in Dogecoin. This strategy aims to attract more users to join the ecosystem.

However, the SHIB team ultimately decided to abandon LEASH's rebase attributes. For more on SHIB's ecosystem, refer to: Shiba Inu (SHIB)--A Memecoin Striving to Shed its Meme Label

Currently, there are relatively few players in the rebase token sector. Notable tokens like BASE from Base Protocol and YAM from Yam Finance haven't been performing optimally. Why?

Limitations of Rebase Tokens

For users, the main benefit of holding rebase tokens is to achieve value stability in the highly volatile crypto market, akin to stablecoins. This is appealing for those who view cryptocurrency as a medium of exchange or store of value.

While this sounds attractive, one might wonder: if one's goal is value stability, why not just opt for USDT?

LEASH appeared to offer another benefit of holding rebase tokens: indirectly benefitting from the price fluctuations of another asset.

Setting aside the discussion about which meme coin, SHIB or DOGE, has better liquidity or a broader audience — if users want to benefit from Dogecoin's returns, why wouldn't they just directly buy Dogecoin?

In essence, the primary limitation of rebase tokens is that they provide seemingly innovative options that users may not really need. Furthermore, their novelty makes them conceptually more challenging for users to grasp, potentially limiting their growth and adoption.