An article on Rebase Token and its limitations

Original title: What is Rebase Token
Original author: TokenInsight
Definition of rebase tokens
Rebase Token, also known as Elastic Token or Elastic Supply Token, is a special type of cryptocurrency. This type of token has a common feature - "Rebase Mechanism", that is, the circulating supply of tokens will be automatically and dynamically adjusted according to the fluctuations of token prices (or the price of the pegged asset). This mechanism is implemented through the smart contract of the token, and stabilizes the actual value of the user's holdings by keeping a certain ratio between the user's holdings and the total supply.
How rebase tokens work
Different rebase tokens have different elastic supply mechanism designs, but generally speaking they all follow the same logic: reduce supply when the price of the coin falls, 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 every 24 hours - that is, Rebase once, with the aim of keeping the price at $1.
Just like 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; and if the price of AMPL drops below $1, the supply will decrease during the Rebase period, thereby increasing the value of each token.
The results of the Rebase will be propagated to all Ampleforth wallets, and their wallet balances will be adjusted proportionally.
It is worth noting that AMPL holders hold a "fixed proportion of the total circulation of AMPL" rather than a fixed amount of AMPL. Therefore, no matter how the rebase occurs, AMPL holders will retain the same proportion of token supply. From the holder's perspective, the amount of AMPL in their wallet will change every 24 hours, but due to the rebase mechanism, the total value of their AMPL wallet has not changed.
Let's take a simple example to further understand:
Assume that there are 100 AMPLs in circulation and you have 10 in your wallet, which means you hold 10% of the total circulation. Imagine that when the market demand suddenly increases in a short period of time, AMPL will become in short supply in the market. We can assume that its price doubles from $1 to $2. In this case, the network will increase the supply of 100 AMPLs in the next Rebase, and the number of AMPLs in your wallet will also change from 10 to (100+100)*10%= 20, but the actual value of your holdings will not change in theory.
While most cryptocurrencies have circulating supply changes, they are fundamentally different from rebase tokens. For example, Bitcoin’s circulating supply is predetermined by a fixed algorithm, while the circulating supply changes of rebase tokens are dynamically adjusted based on market prices.
For more information about the circulation of Bitcoin, please refer to the entry: What is Bitcoin halving?
The meme coin project Shiba Inu also wanted to get involved in the field of rebase tokens. The project once released 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 having to invest in Dogecoin directly, thereby attracting more users to join the ecosystem.
The SHIB team finally decided to abandon the rebase token attribute of LEASH, and the plan to suck blood from Dogecoin also declared bankruptcy. For more information about the SHIB ecosystem, please refer to: What is Shiba Inu (SHIB) - A Memecoin that strives to get rid of the Meme label
Currently, there are still relatively few participants in the field of rebase tokens. In addition to LEASH, which gave up halfway, some of the former leading rebase tokens such as Base Protocol’s BASE and Yam Finance’s YAM have not developed optimistically - why?
Limitations of rebasing tokens
For users, the main benefit of holding rebasing tokens is the stability of value in the highly volatile crypto market. This is a property similar to stablecoins, which is attractive to those who need to use cryptocurrency as a means of exchange and a means of storing value.
It seems very attractive, but from another perspective, since users are pursuing stable value, why don’t they just choose USDT?
LEASH appears to offer another benefit of holding a rebase token: indirectly receiving income from changes in the price of another asset.
Let’s not talk about which of the two meme coins, SHIB and DOGE, has more liquidity and a wider audience - if users want the returns of Dogecoin, why don’t they just buy Dogecoin directly?
In summary, the biggest limitation of rebase tokens is that it uses a seemingly ingenious new way to provide an option that users do not need. And because of its "ingenuity", it is less user-friendly and less approachable in terms of conceptual understanding, further limiting its own development.