Why Rebasing is a Tax on the Uninformed User

Rebasing artificially inflates token supply to create the illusion of yield, decoupling price from market cap. This is a zero-sum game where the protocol mints new tokens to pay 'yield', diluting all holders.

• Passive holders see token count rise but portfolio value stagnates or falls.
• Active sellers cash out the newly minted tokens, extracting value from the pool.
• Protocols benefit from the tax on transfers that funds the rebase, creating a perpetual fee machine.

Real yield is generated from protocol revenue (e.g., fees from swaps, lending, NFT sales) and distributed as a separate token (like ETH or a stablecoin) or via buybacks-and-burns. This creates positive-sum economics.

• Holders receive value without supply inflation.
• Value Accrual is transparent and tied to protocol utility, not token mechanics.
• Examples: Look at GMX (real yield in ETH), Frax Finance (protocol-owned liquidity), and Lido (staking rewards).

Rebasing relies on a transfer tax (e.g., 8-10% on sells) to fund the treasury that mints the 'reflections'. This creates a toxic incentive structure.

• Informed whales can time sells post-rebase to capture the minted tokens.
• Uninformed users provide the exit liquidity, paying the tax and holding the bag.
• This is a regressive tax that punishes liquidity and long-term holding, the opposite of stated goals.

Protocols should separate yield generation from token supply. Use liquid staking tokens (LSTs) or reward-bearing vaults that accrue value visibly.

• Stakers lock tokens to earn fees, with yields visible as an increasing share of the vault.
• Governance remains with the native token, aligning incentives without hidden dilution.
• Adoption Proof: Rocket Pool's rETH, Aave's aTokens, and Compound's cTokens set the standard for transparent yield accrual.

The canonical rebasing experiment proved the model is a tax on inattention. Daily supply adjustments of +/- 10% created massive volatility disconnected from demand.

• Key Flaw: Users saw wallet balances fluctuate wildly, causing panic sells on negative rebases.
• Key Evidence: ~98% price decline from ATH; TVL evaporated as users fled the psychological toll of automated dilution.

OHM's original "(3,3) game theory" relied on a high staking APY funded by bond sales. The rebasing mechanism was the payout vehicle.

• Key Flaw: The model required perpetual new capital inflow, making the rebase a Ponzi-like signal. When growth stalled, stakers faced dilution.
• Key Evidence: Protocol abandoned rebasing in v3, switching to a static gOHM wrapper, tacitly admitting the mechanism's failure to sustain value.

Rebasing tokens catastrophically break automated market maker (AMM) economics. Liquidity providers (LPs) are systematically diluted.

• Key Flaw: A positive rebase increases the token side of an LP position, creating an imbalance that arbitrageurs instantly extract value from.
• Key Evidence: LPs in rebase token pairs consistently underperform simple HODLing, creating a permanent leakage of value from passive participants to active arbitrage bots.

FEI's direct incentives and punitive "reweighting" (rebasing) aimed to maintain a $1 peg. It was a forced, algorithmic central bank.

• Key Flaw: The protocol taxed holders below peg to buy FEI, and rewarded sellers above peg with newly minted FEI—a brutal negative-sum game for users.
• Key Evidence: $1.3B TVL vaporized; the protocol ultimately shut down after failing to achieve stability, demonstrating that user-hostile mechanics cannot enforce a peg.

Beyond mechanics, rebasing imposes a cognitive burden that destroys user confidence. Portfolio management becomes impossible.

• Key Flaw: Users cannot trust their wallet balance from one block to the next, breaking the fundamental store of value premise.
• Key Evidence: Adoption is limited to short-term ponzinomics; no successful long-term, utility-driven project has sustained a rebase model. The market has voted with its wallet.

The market has converged on a superior model: value-accruing wrapper tokens like Lido's stETH. Rewards compound inside the token's price, not via supply changes.

• Key Solution: Price appreciation over dilution. Users see a stable balance with a rising USD value, aligning with natural intuition.
• Key Evidence: $40B+ TVL in LSTs vs. near-zero for rebasing tokens. The verdict is clear: elastic supply is an obsolete, user-hostile abstraction.

Rebasing tokens like Ampleforth or Olympus (OHM) attempt to maintain a price peg by adjusting wallet balances, not the price. This breaks the fundamental accounting unit of DeFi.

• Breaks Composability: Every dApp (Uniswap, Aave, Compound) must write custom logic to handle balance changes.
• Hidden Volatility: Users see a stable token count while their portfolio value in USD swings wildly.
• Tax on Inattention: Users who don't actively manage positions lose value to automated balance reductions.

Rebase mechanics create predictable, extractable value for bots at the expense of regular users.

• Rebase Sniping: Bots front-run positive rebases and dump after distribution, creating sell pressure users pay for.
• Forced Liquidity Events: Daily rebases force mass sell/buy orders on AMMs, generating guaranteed slippage and fees.
• The Uninformed Pay: Passive holders providing liquidity get diluted, while active arbitrageurs (MEV searchers, 3commas bots) capture the rebase value.

Using rebasing tokens as collateral in lending protocols (MakerDAO, Aave) or for price oracles (Chainlink) introduces catastrophic failure modes.

• Collateral Dilution: A negative rebase can silently push a loan below the liquidation threshold without any user action.
• Oracle Manipulation: Rebasing creates artificial volume and price spikes around the event window, breaking TWAP oracles.
• Systemic Risk: Protocols must choose between ignoring rebases (incorrect pricing) or integrating them (complex, bug-prone logic).

Protocols like Lido (stETH), Aave (aTokens), or Compound (cTokens) solve the same problem (tracking underlying value) without rebasing.

• Transparent Accounting: Balance stays constant, value accrues via a rising exchange rate against the underlying asset.
• Seamless Composability: Works natively with all DeFi primitives and oracles without custom code.
• No Hidden Tax: Value accrual is explicit and cannot be front-run or diluted by passive holders.