Rebasing Token

Originally Terra (LUNA), its sister stablecoin UST used an algorithmic burn-and-mint equilibrium with LUNA to maintain its peg. While not a daily rebasing token, the core mechanism involved supply adjustment: minting LUNA to absorb UST when below peg, and burning LUNA to mint UST when above peg. This made LUNA's supply highly elastic in response to UST demand. The protocol's collapse in May 2022 is a seminal case study in the risks of algorithmic stablecoin design and reflexive feedback loops.

Early algorithmic stablecoin experiments implementing on-chain expansion and contraction cycles. Both used a bonding and coupon system during contraction phases instead of direct balance reductions. Key differentiators:

• ESD: Operated in epochs; users could bond ESD during deficits to receive future expansion rewards.
• DSD: Added a dynamic supply adjustment frequency, moving from 8-hour to 2-day epochs to improve stability.
• Both highlighted challenges with coordination games and maintaining peg during sustained market stress.

Rebasing tokens are frequently used as the reward mechanism in staking protocols. Instead of distributing new tokens, the protocol increases each holder's balance proportionally. This mechanism is central to protocols like Olympus DAO (OHM), where staking "wOHM" results in a rebasing increase of the token balance, representing the accrued yield. This design aims to create a predictable, auto-compounding yield for long-term holders without requiring manual claim transactions.

Integrating rebasing tokens as collateral in money markets like Aave or Compound presents unique challenges. The constantly changing token balance in a user's wallet or a smart contract can cause accounting errors. Common solutions include:

• Wrapping the rebasing token into a static, non-rebasing version (e.g., wsOHM for staked OHM).
• Using rebasing-aware adapters in the lending protocol's smart contracts to correctly track the evolving collateral value. This ensures loan-to-value ratios and liquidation logic remain accurate despite supply changes.

Providing liquidity with a rebasing token in an Automated Market Maker (AMM) like Uniswap requires careful management. If the token rebases while in a liquidity pool, the pool's composition becomes imbalanced. Standard practice is to deposit the wrapped, non-rebasing version of the token into the pool. Protocols often create dedicated liquidity pools for these wrapped assets (e.g., OHM/DAI pools using wsOHM). The rebasing action then occurs off-chain in the wrapper contract, preserving the integrity of the constant product formula x * y = k.

Rebasing mechanisms are a core tool for protocol-controlled value (PCV) and treasury management. By directing rebase rewards to a protocol's treasury (instead of individual holders), the protocol can accumulate assets to fund protocol-owned liquidity (POL). This creates a flywheel: treasury assets generate yield, part of that yield is used to buy more liquidity pool tokens, which increases price stability and generates more fee revenue for the treasury. This model decouples token emissions from direct seller pressure.

Accurate price feeds for rebasing tokens are critical for DeFi integrations. Standard oracles must account for the elastic supply. The reported price must reflect the value per token after rebasing adjustments. Solutions include:

• Index or share price oracles that track the underlying value of a claim on the rebasing token's treasury (e.g., the price of gOHM, which represents a fixed share of the OHM treasury).
• Rebase-aware oracle contracts that adjust the reported price based on the current rebase index, ensuring that collateral value calculations in other protocols remain correct.

User-facing applications like MetaMask and DeFi dashboards must handle the display of rebasing token balances. A naive implementation shows a balance that changes without visible transactions, confusing users. Best practices involve:

• Displaying the "wrapped" or "staked" balance which remains static between rebases.
• Showing a separate "rebasing rewards" or "index-adjusted balance" to visualize accrued yield.
• Calculating and displaying an APY based on the historical rebase rate. This abstraction layer is crucial for user experience and accurate portfolio tracking.

A rebase is an on-chain event where the total token supply is algorithmically expanded or contracted. User wallet balances are proportionally adjusted to maintain their percentage ownership of the total supply. For example, if the market price is 10% below the target peg, a positive rebase might increase all balances by 10% to reduce the per-token price back to $1.00. This is distinct from airdrops or mint/burn events, as it's a uniform, protocol-level adjustment.

The primary goal is to achieve a price peg, often to $1.00. However, the mechanism operates on supply elasticity. The protocol does not directly set the price; it modifies supply in response to market price deviations. Key formulas include:

• Rebase Percentage: (Target Price / Market Price) - 1
• New Balance: User Balance * (1 + Rebase Percentage) This creates a feedback loop where increased demand triggers supply contraction (raising price), and decreased demand triggers supply expansion (lowering price).

Rebasing introduces unique attack vectors and risks:

• Integration Complexity: Smart contracts and DEX pools must be explicitly designed to handle balance changes, or funds can be lost. The balanceOf address can change between transactions.
• Oracle Reliance: The rebase calculation depends on a price oracle (e.g., Chainlink). Oracle manipulation or failure breaks the peg mechanism.
• Front-Running: Malicious actors can anticipate rebase events and exploit timing differences in transactions.
• Tax Implications: Constant balance adjustments can create complex taxable event scenarios in some jurisdictions.

The elastic supply model creates non-standard economic behaviors:

• Volatile Token Count, Stable Value: A user's wallet balance fluctuates, but their portfolio's dollar value aims to remain stable relative to the peg.
• Staking & Farming Complications: Yield calculations in liquidity pools must account for the changing underlying token quantities, often requiring specialized rebase-aware gauges.
• Perception of Loss: Users may perceive a decreasing token count (negative rebase) as a loss, even if their dollar value is preserved, creating psychological friction.

Ampleforth (AMPL) pioneered the rebasing model, targeting the 2019 USD CPI-adjusted dollar. Olympus DAO (OHM) and its forks use a variant called (3,3) staking, where rebases reward stakers, creating a high APY incentive. Empty Set Dollar (ESD) and Dynamic Set Dollar (DSD) were algorithmic stablecoin experiments using rebasing. These case studies highlight the challenges of maintaining pegs during extreme market volatility and the critical role of incentive design.

Rebasing is one approach in the broader algorithmic stablecoin and elastic finance landscape. Alternatives include:

• Collateralized Stablecoins (DAI, LUSD): Peg maintained by over-collateralized debt positions.
• Fractional-Algorithmic (FRAX): Hybrid model using partial collateral and algorithmic mechanisms.
• Seigniorage Shares (TITAN, IRON): Uses a multi-token system where one token is stable and a secondary token absorbs volatility and seigniorage. Understanding these contrasts is essential for evaluating the trade-offs between capital efficiency, stability, and systemic risk.

The profit made by the issuer of a currency from the difference between its face value and its production cost. In algorithmic tokenomics, seigniorage shares refer to a model where a secondary token captures the value generated when the primary stablecoin's supply expands. Holders of the share token are incentivized to help maintain the peg, as they receive newly minted tokens during expansionary phases. This creates a complex, often volatile, incentive system.

A token property where the circulating supply automatically adjusts according to a predefined formula or oracle price. Rebasing is the primary method for implementing elastic supply. Key characteristics include:

• Supply changes apply proportionally to all holders' wallets.
• The user's percentage ownership of the network remains constant.
• The goal is to create price elasticity and drive value toward a target, often used in decentralized finance (DeFi) protocols for stability or yield generation.

A tokenomics model that distributes rewards to holders automatically via transaction taxes. While both rebasing and reflection change a holder's balance, the mechanism differs fundamentally:

• Rebasing: Adjusts the global supply; your balance changes in all wallets/exchanges simultaneously.
• Reflection: Sends additional tokens directly to your wallet as a percentage of every transaction. Reflection does not alter the total supply. Examples include SafeMoon and EverRise.

A key metric measuring the total capital deposited in a DeFi protocol. Rebasing tokens present a unique challenge for TVL calculation because a user's token balance quantity changes daily. Accurate measurement requires tracking the underlying value of the position (quantity * target price) rather than the simple token count. This affects how protocols like Yield Farming platforms account for user deposits and rewards denominated in rebasing assets.