Rebase Tokens: Nalinee Singh explains this new financial instrument and the pros and cons of using them.
Decentralized Finance (or DeFi for short) allows users to trade directly amongst themselves through an algorithm; this algorithm is known as a smart contract. Instead of a broker or a bank, DeFi will become the standard in the very near future.
DeFi promises more affordable and direct access to financial services such as earning interest, borrowing, lending, buying insurance, trading derivatives, trading assets, and much more. And, DeFi has seen exponential growth in the past few years. This is, in part, due to its return-on-investment (ROI)-optimizing strategy, staking. What is staking?
Staking is an increasingly popular crypto-economic model for efficiently scaling the security of decentralized systems. Staking is the act of locking up cryptocurrencies to receive rewards; this necessitates holding digital assets in a cryptocurrency wallet , which helps in making the underlying blockchain of that asset more secure and more efficient (also known as Proof of Stake, or POS).
In return, stakers (i.e. investors) are incentivized with rewards for participating in the health and longevity of the project. There are many cryptocurrency projects – including Olympus DAO , Wonderland , and other OHM forks – that base their primary growth strategy on staking. Rebase rewards from staking
There are several ways a project can distribute staking rewards to investors. Olympus DAO and its countless forks, such as Wonderland, have utilized a specific distribution method in the form of rebase. Investors in these projects are required to stake their tokens and in return, are given a representative token that accumulates the rebases. These tokens are called rebase tokens.
In the case of Olympus DAO, staked OHM (their native token) becomes gOHM and for Wonderland. TIME becomes MEMO when staked. For these projects, rebases are allocated at the end of each epoch (or unit of time), which is usually every 8 hours. By having frequent epochs these rebases compound rapidly and can lead to returns up to 30,000% p.a. or more, drawing in Annual Percentage Yield (APY) chasers looking to rake in ludicrous returns. Rebase tokens: What exactly are they?
In the simplest form, a rebase token is also known as an elastic supply token. What this means is that there is a price target. According to supply and demand, the protocol can change its circulating supply daily to achieve less volatility . For instance, let’s say we have an elastic supply token (i.e. rebase token) that wants the value to remain at $1 (price target). If the price goes above $1, then the tokenomics (i.e. token economics) would inflate the current circulating supply, so the supply of the token would increase, bringing the price back down to the $1.
The opposite side to that would apply if the price of the rebase token falls below the $1. Deflation would occur in the circulating supply and investors would receive less tokens in order to bring that price back up to the $1. High Rebase Reward
Currently, most Olympus Forks provide extremely high APYs to investors. These APYs can range from 50K to millions of percentages. At the time of rebasing, the market capitalization of the rebase tokens increases. However, the increase is not backed by any substantial growth in the treasury. This leads to a dilution – that can be temporary if it is being stabilized by arbitrage.
This scenario causes a downward selling pressure as the tokens are minted and pegged to $1 by its treasury. However, the same $1 backed tokens are sold into the open market for market-value, thus putting heavy downward selling pressure on the underlying token price. Rebase tokens: Who controls them?
The majority of rebase tokens are run by Decentralized Autonomous Organizations (DAOs) – a DAO is an entity with no central leadership. Decisions get made from the bottom-up, governed by a community organized with a specific set of rules enforced on a blockchain.
Staking rewards is a profit distribution mechanism that the rebase token uses, which simply means any profits that the treasury makes are distributed to the stakers.
Let’s take the example of Olympus DAO: “The protocol distributes tokens by sending them to the staking contract without asking for sOHM back. This increases the ratio of OHM staked to sOHM outstanding, and results in a rebase to correct the difference. For example: there are 500k OHM staked and 500k sOHM outstanding. The protocol produced $5k profit for the day, which it uses to mint and back 5k OHM. It sends those OHM […]
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