Rebase

The core mechanism of a rebase token is its elastic supply, which expands or contracts automatically. When the market price is above the target peg, the protocol mints new tokens and distributes them to all holders, increasing supply to push the price down. Conversely, when the price is below the peg, tokens are burned from all wallets, reducing supply to increase the price. This is distinct from collateral-backed stablecoins like DAI or USDC.

Every rebase token is designed to track a specific price target, most commonly $1.00. The protocol's smart contract continuously compares the token's market price (via an oracle) to this target. The rebase function is triggered at predetermined intervals (e.g., every 8 hours) to calculate the necessary supply adjustment. The goal is price stability, not to create a speculative asset, though market dynamics often lead to volatility around the peg.

During a rebase event, the change in total supply is applied proportionally across all token holders. If the supply increases by 10%, every wallet balance increases by 10%. If the supply decreases by 5%, every wallet balance decreases by 5%. This means a holder's percentage ownership of the total supply remains constant. The adjustment happens automatically in the user's wallet; no manual action is required.

Due to market forces and the discrete nature of rebase events, these tokens often exhibit rebase lag. The price may drift from the peg between adjustments, and the supply change may not fully correct the price in a single cycle. This can lead to slippage and temporary arbitrage opportunities. The effectiveness depends on the frequency of rebases, the oracle's accuracy, and overall market liquidity.

Prominent examples illustrate different implementations:

• Ampleforth (AMPL): The pioneering rebase token, targeting the 2019 USD CPI-adjusted dollar.
• Olympus DAO (OHM): Introduced the (3,3) game theory and bonding mechanism, though its stability comes primarily from treasury backing rather than pure rebase mechanics.
• Tomb Finance (TOMB): An algorithmic stablecoin on Fantom designed to peg to Fantom (FTM) via seigniorage and a multi-token system.

Rebase mechanics create unique challenges in DeFi protocols. Since wallet balances change, they are not ideal as direct collateral in lending markets without wrappers. Many protocols use wrapped versions (e.g., sAMPL, wAMPL) that represent a static claim on the underlying rebasing token's supply share. This wrapper token has a fixed quantity but a fluctuating value, making it compatible with standard ERC-20 infrastructure.

A rebase algorithmically increases or decreases the token supply in all holders' wallets proportionally to move the market price toward a target. This is distinct from stablecoin mint/burn mechanisms.

• Positive Rebase: Supply increases when price > target; new tokens are distributed to holders.
• Negative Rebase: Supply decreases when price < target; tokens are removed from all wallets.
• Key Property: Each holder's percentage of the total supply remains constant, but their token count changes.

The rebase logic is implemented in a smart contract, introducing significant attack surface.

• Oracle Dependency: Most rebases rely on a price oracle (e.g., Chainlink, TWAP). Manipulating this price feed can trigger incorrect rebases.
• Logic Bugs: Flaws in the rebase calculation, timing, or eligibility can lead to incorrect token minting/burning.
• Integration Risk: DApps (like DEX pools, lending markets) must specially handle the changing token balance, leading to potential exploits if not implemented correctly.

While designed for stability, rebase mechanics can create unique economic distortions.

• Reflexivity: Expectation of a positive rebase can drive buying, creating a feedback loop (and vice versa for negative rebases).
• Unit Bias Confusion: Users often misinterpret a change in token quantity as a change in portfolio value, leading to poor decision-making.
• Tax Implications: In some jurisdictions, each rebase event (change in token quantity) may be considered a taxable event, creating accounting complexity.

Ampleforth is the canonical example of a rebase token, targeting a value of $1 (adjusted for CPI).

• Daily Rebase: The supply adjusts once per day based on the time-weighted average price (TWAP) from the prior 24 hours.
• Elastic Supply: The protocol's goal is monetary policy, not to be a payment stablecoin. It aims for a unit of account that is independent of debt or collateral.
• Historical Data: AMPL has experienced periods of extreme supply expansion and contraction, demonstrating the volatility inherent in the model.

This is a two-token model often paired with a rebase token to absorb volatility and capture value.

• Elastic Token: The rebasing asset (e.g., a stablecoin).
• Share Token: A non-rebasing token that receives the seigniorage (profit) from supply expansion. During a positive rebase, new elastic tokens are minted and sold, with proceeds used to buy back and burn share tokens.
• Risk Transfer: Shareholders bear the brunt of the system's instability but are rewarded during expansion phases. Examples include the original Basis Cash model.

Rebase tokens are fundamentally different from collateralized stablecoins like DAI or USDC.

Elastic supply refers to a token's ability to programmatically expand or contract its circulating supply, typically via a rebase mechanism. This is distinct from fixed-supply assets like Bitcoin.

• Purpose: Designed to achieve price stability or target a specific value, often a stablecoin peg.
• Mechanism: Supply changes are applied proportionally to all holders' wallets, maintaining their percentage ownership of the network.
• Example: Ampleforth (AMPL) adjusts its supply daily based on deviations from its target price.

In rebase tokenomics, seigniorage is the value captured by the protocol when it creates new tokens during a positive rebase (supply expansion). This concept is central to algorithmic stablecoin designs.

• Process: When the token trades above its peg, the protocol mints new tokens and distributes them to holders or a treasury.
• Use of Funds: Seigniorage can be used for protocol-owned liquidity, buybacks, or staking rewards.
• Risk: Relies on continuous demand; failure can lead to a death spiral of negative rebases.

An algorithmic stablecoin is a type of cryptocurrency that uses on-chain algorithms, often including rebase mechanics, to maintain its price peg without being fully backed by collateral.

• Mechanisms: May combine rebasing with seigniorage shares, bonding, or liquidity incentives.
• Goal: Achieve decentralization and capital efficiency compared to fiat-collateralized stablecoins.
• Historical Context: Famous examples include Terra's UST (which failed in 2022) and Frax Finance's FRAX (which uses a partial collateral model).

The rebase index (or the concept of shares) is a critical accounting mechanism that separates a user's proportional ownership from the fluctuating token supply.

• Function: Tracks a user's underlying stake in the protocol. When a rebase occurs, the total supply changes, but a holder's share of that supply remains constant.
• User Experience: Wallets display a balance that changes with rebases, but the protocol internally tracks immutable shares.
• Importance: Ensures fairness and prevents dilution of ownership during supply adjustments.

A negative rebase is a decrease in the token's circulating supply, triggered when its market price falls below the target peg. This is a deflationary mechanism intended to increase scarcity and push the price back up.

• Effect: All holders see their token balance decrease proportionally.
• Challenge: Can create negative user sentiment and selling pressure, potentially exacerbating the downward price movement.
• Risk: Persistent negative rebases can signal a failing peg and lead to a death spiral.

A reliable oracle is essential for any rebasing token, as it provides the trusted external market price data that triggers the supply adjustment mechanism.

• Role: Feeds the current market price of the token to the smart contract on-chain.
• Critical Dependency: The security and liveness of the oracle are paramount. A manipulated or delayed price feed can cause incorrect rebases.
• Common Solutions: Projects use decentralized oracle networks like Chainlink or create their own liquidity pool-based price feeds.