Understanding Fork-Based Tokens in One Article Definition, Operation Mechanism, and Limitations

Understanding Fork-Based Tokens Definition, Mechanism, and Limitations

Definition of Rebase Token

A Rebase Token, also known as an Elastic Token or Elastic Supply Token, is a type of special cryptocurrency. These tokens have a common characteristic – the “Rebase Mechanism,” which automatically adjusts the circulating supply of tokens based on the fluctuation of token prices (or the prices of underlying assets). This mechanism is implemented through the token’s smart contract, aiming to stabilize the actual value of users’ holdings by maintaining a certain ratio between the users’ holdings and the total supply.

Operating Mechanism of Rebase Token

Different Rebase Tokens have different designs for their elastic supply mechanism. However, overall, they follow the same logic: decrease supply when the price drops and increase supply when the price rises.

Take Ampleforth as an example.

Ampleforth (AMPL) is a decentralized stablecoin project on Ethereum and one of the earliest projects to apply the Rebase mechanism. The circulating supply of AMPL tokens is adjusted once every 24 hours – that is, one Rebase – with the goal of maintaining the price at $1.

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Similar to how currency issuance dilutes 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. On the other hand, if the price of AMPL falls below $1, the supply will decrease during the Rebase period, thereby increasing the value of each token.

The result of Rebase will propagate to all Ampleforth wallets, and their wallet balances will be adjusted proportionally.

It is worth noting that AMPL holders hold a “fixed ratio of the total circulating supply of AMPL” rather than a fixed quantity of AMPL. Therefore, regardless of Rebase, AMPL holders will retain the same proportion of token supply. From the perspective of holders, the quantity of AMPL in their wallets will change once every 24 hours. However, due to the Rebase mechanism, the total value of their AMPL wallets remains unchanged.

Here’s a simple example to further understand:

Suppose there are currently 100 AMPL tokens in circulation, and you have 10 tokens in your wallet, which represents 10% of the total circulating supply. Imagine that when there is a sudden increase in market demand, AMPL becomes scarce in the market. Let’s assume its price doubles from $1 to $2. In this case, the network will increase the supply of AMPL by 100 tokens during the next Rebase, and your AMPL holdings in your wallet will also increase from 10 tokens to (100 + 100) * 10% = 20 tokens. However, theoretically, the actual value of your holdings remains unchanged.

While most cryptocurrencies have changes in their circulating supply, they have fundamental differences from Rebase Tokens. For example, the circulating supply of Bitcoin is predetermined by a fixed algorithm, whereas the circulating supply of Rebase Tokens dynamically adjusts based on market prices.

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

The Meme Coin project Shiba Inu also once wanted to enter the field of rebase tokens. The project had issued LEASH as a rebase 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, in order to attract more users to join the ecosystem.

The SHIB team eventually decided to abandon the rebase token attribute of LEASH, and the plan to suck the blood of Dogecoin was declared bankrupt. For more information about the SHIB ecosystem, please refer to: What is Shiba Inu (SHIB) – A Memecoin Trying to Get Rid of the Meme Label.

Currently, there are still relatively few participants in the field of rebase tokens. In addition to the abandoned LEASH, some former top rebase tokens such as BASE of Base Protocol and YAM of Yam Finance have also had unfavorable development. Why is that?

Limitations of Rebase Tokens

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

It seems appealing, but from another perspective, if users pursue value stability, why don’t they simply choose USDT?

LEASH seems to offer another benefit of holding rebase tokens: indirectly gaining profits from price changes of another asset.

Setting aside which one, SHIB or DOGE, has more liquidity and a wider audience – if users want the returns of Dogecoin, why don’t they simply buy Dogecoin directly?

In conclusion, the biggest limitation of rebase tokens is that it provides a choice that users do not necessarily need, using a seemingly innovative new approach. And because of its “innovation,” it is less user-friendly and less accessible in terms of conceptual understanding, further limiting its development.

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