Rebasing Mechanism

A rebasing token does not maintain a fixed supply. Its total circulating supply expands or contracts algorithmically based on market conditions. When the market price is above the target peg, a positive rebase mints and distributes new tokens to holders. When below, a negative rebase burns tokens from holders' wallets. The number of tokens in a wallet changes, but the holder's proportional stake in the network remains constant.

The entire mechanism is governed by a predefined price target, most commonly $1.00 (pegged to the US Dollar). The rebase function uses an oracle or a time-weighted average price (TWAP) to compare the market price against this target. The magnitude of the supply adjustment is proportional to the price deviation. This creates a reflexive, supply-side feedback loop intended to drive the price toward the peg.

Supply adjustments do not occur continuously but at predetermined intervals called epochs. A common epoch length is 8 hours. At the end of each epoch, the protocol calculates the required adjustment and executes the rebase. This periodic, batched approach reduces gas costs and front-running opportunities compared to a continuous model. Users see their token balance update automatically at each epoch.

A core principle is that rebasing should not dilute ownership. When new tokens are minted during a positive rebase, they are distributed pro-rata to all existing holders. This means a wallet holding 1% of the supply before the rebase will still hold 1% after, albeit with a larger nominal token amount. The mechanism is designed to be non-custodial and automatic, requiring no user action to claim rewards.

Rebasing is often conflated with staking rewards, but they are distinct mechanisms. In staking, users lock tokens to receive new tokens as a reward, increasing their absolute and proportional share. In rebasing, the token supply itself changes for everyone; no locking is required, and proportional shares remain unchanged. Some protocols combine both, where staked tokens are automatically subject to rebases.

Ampleforth (AMPL) pioneered the rebasing model, targeting the 2019 US CPI-adjusted dollar. Olympus DAO (OHM) and its forks use a rebasing mechanism for staked tokens (sOHM, gOHM) to distribute protocol revenue. Tomb Finance uses rebasing Tomb Shares (TSHARE) to maintain the peg of its algorithmic stablecoin, TOMB, to Fantom's FTM token. Each implements unique parameters for epoch, target, and oracle design.

Rebasing implementations differ in their triggers and distribution:

• Price-Based Rebase: Supply adjusts based on oracle price (e.g., Ampleforth).
• Reward Rebase: New tokens minted and distributed as staking rewards (e.g., Olympus).
• Epoch vs. Continuous: Adjustments occur at set intervals (epochs) or in near real-time.
• Balance vs. Supply Adjustment: Can change individual wallet balances or the total supply scalar.

A rebasing mechanism automatically adjusts the total token supply in all wallets to maintain a target price, typically pegged to another asset like a stablecoin. Instead of the token's market price changing, the quantity of tokens each holder owns changes. This is achieved through a rebase function that calculates a supply delta based on the deviation from the peg and proportionally mints or burns tokens from every address.

• Goal: Achieve price stability without relying on collateral reserves.
• Example: If the token price is 10% above its $1 peg, the protocol increases the total supply by 10%, diluting each holder's balance to bring the per-token price back down.

Rebasing creates a unique user experience where a wallet's token balance fluctuates daily, even without any transactions. This has critical implications:

• Balance Volatility: The number of tokens you hold changes, but your share of the total supply (and thus your percentage of the network) remains constant.
• Tax Treatment: In many jurisdictions, each rebase event (an increase or decrease in token quantity) may be considered a taxable event, creating significant accounting complexity for users. This differs from staking rewards, which are typically separate, discrete events.

Integrating rebasing tokens into decentralized finance (DeFi) protocols like lending markets or automated market makers (AMMs) introduces specific risks:

• Balance Synchronization: Protocols must actively track and account for the changing token balances within user positions and smart contracts, or risk internal accounting errors.
• Oracle Reliance: Accurate price feeds are critical for the rebase calculation. Manipulation of the oracle price can trigger incorrect supply adjustments.
• Example: A lending platform using a rebasing token as collateral must ensure its vault contracts correctly update the collateral amount after each rebase to avoid improper liquidations.

The rebasing mechanism itself can be a target for economic attacks, primarily focused on manipulating the price oracle or exploiting the rebase lag.

• Oracle Manipulation: An attacker could artificially inflate or deflate the reported price on a DEX to trigger a beneficial rebase for their position.
• Rebase Timing Attacks: A user might deposit a large amount of tokens just before a positive rebase (inflation) and withdraw immediately after, capturing value from other holders ("rebase farming").
• Defense: Protocols use time-weighted average prices (TWAP) oracles and implement rebase cooldowns or locks to mitigate these vectors.

Rebasing is often a core component of algorithmic stablecoin designs, but it differs from pure seigniorage models.

• Rebasing Token: Adjusts supply in all wallets. The peg asset (e.g., USD) is a target, not held in reserve. Examples include Ampleforth (AMPL).
• Seigniorage Model (Multi-Token): Uses a multi-token system (e.g., stablecoin, share token, bond token) to expand and contract supply. The stablecoin itself typically does not rebase. Examples include the original Basis Cash or Empty Set Dollar (ESD).
• Key Difference: Rebasing affects all holders uniformly, while seigniorage models transfer value between different token holder classes.

A rebasing mechanism algorithmically increases or decreases the token supply in all holder wallets proportionally, without requiring manual action. The process:

• Targets a peg: Often aims to stabilize value relative to an asset (e.g., 1 token = $1).
• Adjusts balances: If the market price is above the target, the protocol mints and distributes new tokens to holders, increasing supply and theoretically lowering price.
• Preserves ownership share: Each holder's percentage of the total supply remains constant, as the rebase is applied uniformly.

This is distinct from a buyback-and-burn model, which reduces total supply but does not adjust individual wallets automatically.

Rebasing is a foundational mechanism for algorithmic stablecoins like Ampleforth (AMPL), which seeks to maintain a purchasing power peg. Key operational details:

• Rebase events occur at regular intervals (e.g., daily) based on oracle-reported price deviations from the target.
• Positive rebase: If AMPL trades at $1.10, a +10% supply expansion occurs in all wallets.
• Negative rebase: If AMPL trades at $0.90, a -10% supply contraction occurs.

The goal is to create elastic money where the unit count adjusts, not the nominal price, incentivizing arbitrageurs to correct price deviations.

Integrating rebasing tokens into standard DeFi protocols (e.g., AMMs, lending markets) creates significant technical friction:

• Balance synchronization: DApps must listen for rebase events and update user interface balances in real-time, which standard ERC-20 interfaces don't natively support.
• AMM pool dilution: In a constant product AMM like Uniswap, a rebase changes the token's balance in the pool without a trade, potentially creating arbitrage opportunities and impermanent loss for liquidity providers.
• Collateral valuation: In lending protocols, a negative rebase reduces the collateral value of a user's position without a market sale, which can trigger unexpected liquidations if not accounted for in the smart contract logic.

For end-users and accountants, rebasing tokens introduce non-intuitive challenges:

• Wallet display issues: Native wallet interfaces may show a fluctuating token balance without clear explanation, confusing users expecting a static balance.
• Tax implications: Regulatory treatment is complex—are supply expansions taxable income? Jurisdictions like the IRS may view positive rebases as airdrops or dividends.
• Portfolio tracking: Standard portfolio trackers often fail to correctly account for the changing supply, requiring specialized integration to display accurate value and cost basis over time.

To mitigate integration issues, wrapper tokens are commonly used. These are standard, non-rebasing ERC-20 tokens that represent a claim on the underlying rebasing asset.

• How it works: Users deposit a rebasing token (e.g., AMPL) into a smart contract, which mints a wrapped version (e.g., WAMPL). The wrapper contract absorbs all rebase adjustments internally.
• Benefits for DeFi: Wrapped tokens have a static supply, making them compatible with all existing DApps, AMM pools, and lending protocols.
• Trade-off: Users must trust the wrapper contract's security and actively manage wrapping/unwrapping to capture rebase rewards or utilize the native token.

Seigniorage share models, used by protocols like Empty Set Dollar (ESD) and later iterations, expand on rebasing mechanics with a two-token system:

• Stablecoin token: The rebasing asset intended to maintain the peg.
• Governance/share token: A separate token that captures the protocol's seigniorage (profit).
• Mechanism: During a positive rebase (expansion), new stablecoins are minted. A portion is used to buy share tokens from a bonding curve or market, distributing value to shareholders. This creates a dual incentive system for stabilizing the peg.

A tokenomic model where the total supply of a token expands or contracts algorithmically, typically based on a target price or index. The rebasing mechanism is the specific function that executes these supply changes. Key characteristics include:

• Supply Adjustments: The total supply changes, not the token's market cap.
• Holder Proportionality: All wallets see their token balance change by the same percentage.
• Price Target: Often used to maintain a stablecoin peg (e.g., Ampleforth) or track an index.

The profit made by the issuer of a currency from the difference between its face value and production cost. In algorithmic stablecoins using rebasing, seigniorage describes the process where:

• Expansion Phase: New tokens are minted when price is above target and distributed to stakers/treasury.
• Contraction Phase: Tokens are burned or removed from circulation when price is below target, often via negative rebase. This creates economic incentives to stabilize the token's price.

An alternative to rebasing for distributing rewards. Instead of changing all wallet balances, reflection mechanisms automatically distribute a tax on transactions (e.g., 2-10%) as new tokens to existing holders. Key differences from rebasing:

• Static Supply: The global token supply increases, but your individual token count stays the same.
• Passive Yield: Rewards accrue simply by holding the token in a non-custodial wallet.
• Transaction-Dependent: Rewards are generated only when others buy/sell/transfer.

The primary method for users to opt-in to rebasing mechanics. To receive elastic supply adjustments or seigniorage rewards, tokens must often be staked in a protocol contract. This separates rebasing tokens from staking derivatives:

• Rebasing Token (e.g., sOHM): The staked token's balance in your wallet changes automatically.
• Wrapper Token (e.g., gOHM): A non-rebasing representation of your stake; its quantity is static, but its value increases. Vaults automate this process and often compound rewards.

The critical external data source that triggers rebase functions. Most rebasing protocols rely on decentralized oracle networks (like Chainlink) to determine if the token's market price deviates from its target. The mechanism works as:

• Price Deviation Check: The smart contract queries the oracle at a set interval (e.g., every 8 hours).
• Rebase Calculation: If the deviation exceeds a threshold (e.g., ±5%), a rebase percentage is calculated.
• Execution: The contract calls the rebase function to adjust supplies accordingly. Oracle manipulation is a key systemic risk.

A decentralized stablecoin that uses on-chain algorithms, rather than collateral, to maintain its peg. Rebasing is one of several mechanisms used:

• Rebasing Models: Adjust supply to target price (e.g., Ampleforth, Empty Set Dollar).
• Seigniorage Models: Use multi-token systems with share and bond tokens (e.g., original Olympus DAO, Tomb Finance).
• Hybrid Models: Combine rebasing with partial collateralization or other stabilizers. These models are distinguished from collateralized stablecoins like DAI or USDC.