Reflection Token

The core mechanism where a transaction tax (e.g., 5-10%) is applied to every buy and sell. A portion of this tax is instantly converted and distributed proportionally to all existing token holders based on their balance. This process is executed on-chain by the smart contract, requiring no manual claiming by users.

Many reflection tokens combine redistribution with a token burn. Part of the transaction tax is permanently removed from circulation by sending it to a burn address (e.g., 0x000...dead). This reduces the total supply over time, creating a deflationary pressure that can theoretically increase the scarcity and value of the remaining tokens.

• Example: Safemoon's original contract burned tokens and reflected a portion of the tax.

Rewards are typically paid in the native token of the contract (e.g., holding BNB rewards you in BNB). The yield is dynamic and depends on:

• Trading Volume: Higher volume generates more tax revenue to distribute.
• Holder's Share: Rewards are proportional to the percentage of the total supply held.
• Tax Rate: The specific percentages set for redistribution vs. other functions (liquidity, marketing).

A portion of the transaction tax is often automatically used to fund the liquidity pool. This mechanism:

• Increases Liquidity: Adds token/paired asset (e.g., ETH) to the DEX pool, reducing price slippage.
• Enhances Price Stability: A deeper pool is harder to manipulate.
• Automates Growth: The contract autonomously provides liquidity, which is often locked to assure investors of its permanence.

All reflection mechanics are immutably encoded in the token's smart contract (e.g., on Ethereum, BSC, or Polygon). This ensures:

• Trustlessness: No central entity controls the distribution.
• Transparency: The rules are public and verifiable.
• Automatic Execution: Functions trigger upon meeting predefined conditions (transfer functions).

Key contract functions include _transfer, _reflectFee, and _takeLiquidity.

Prominent Examples: SafeMoon (BSC), Reflect Finance (ETH), EverRise. Key Considerations:

• Impermanent Loss Risk for LPs: Liquidity providers face standard DEX risks.
• Sell Pressure: High reward rates may incentivize selling, not holding.
• Contract Risk: Code vulnerabilities or malicious functions (e.g., hidden minting) are a critical concern. Always audit the contract.

A reflection token is a smart contract-based cryptocurrency that automatically applies a tax (e.g., 5-10%) on every buy and sell transaction. This tax is then redistributed proportionally to all existing token holders in real-time, rewarding them simply for holding the token in their wallet. This mechanism is enforced directly by the token's contract logic, not by staking or manual claims.

The transaction fee is typically split between two primary functions:

• Holder Rewards: The majority of the fee is reflected to holders.
• Liquidity/Project Treasury: A portion is often automatically added to the token's liquidity pool or sent to a treasury to fund development and marketing, enhancing long-term stability. This creates a self-sustaining economic loop where trading activity directly funds rewards and project growth.

Reflection is implemented via a modified ERC-20 or BEP-20 token contract that overrides the standard _transfer function. It calculates the fee, deducts it from the transfer amount, and then distributes the fee tokens by minting new supply or by adjusting balances. Key contract functions include tracking total supply for reward calculations and excluding addresses (like the liquidity pool) from receiving rewards to prevent circular logic.

SafeMoon (SAFEMOON) popularized this model on Binance Smart Chain with an 8% transaction tax. EverRise (RISE) introduced a "buyback" mechanism paired with reflections. Reflecto (RTO) distributed rewards in multiple established tokens like BUSD. These projects demonstrated both the model's appeal for community building and the regulatory and sustainability challenges it can pose.

Advantages:

• Passive Income: Encourages long-term holding (HODLing).
• Automatic: No staking or manual claiming required.
• Community Incentive: Aligns holder and project success.

Criticisms:

• Sell Pressure: High fees can discourage trading and liquidity.
• Regulatory Scrutiny: May be classified as an unregistered security.
• Ponzi Dynamics: Relies on new buyers to fund rewards for earlier holders.

• Dividend Tokens: Similar reward concept but often with manual claim processes.
• Auto-Staking / Rebasing Tokems: Like Olympus (OHM), which adjust balances automatically but through a different mint/burn mechanism.
• Transaction Tax Tokems: A broader category including tokens with fees for buyback, marketing, or charity, not just holder redistribution.
• Tokenomics: The overarching study of token design, supply, and incentive structures.

A reflection token implements a transaction tax (e.g., 5-10%) on every buy and sell. A portion of this tax is redistributed proportionally to all existing token holders, rewarding them for holding. This creates a passive income stream without requiring staking or manual claiming. The mechanism is coded directly into the token's smart contract and executes automatically on each transfer.

The economic model faces criticism for resembling a Ponzi scheme, as rewards for early holders are funded by taxes paid by new buyers. Long-term sustainability depends on continuous net-positive inflow of capital and transactions. If sell pressure outweighs buy pressure, the redistributed value can decline rapidly. This creates a reflexive feedback loop where price declines can accelerate due to diminishing rewards.

The reflection logic is embedded in the token contract, introducing critical smart contract risk. Flaws in the redistribution math or fee handling can lead to fund loss. Many projects retain high owner privileges, allowing them to modify tax rates or disable the mechanism. Holders must audit for functions like setTaxFee or a mint function that could inflate supply, diluting rewards.

The transaction tax acts as friction on trading, increasing the cost to enter or exit a position. This can reduce effective liquidity and increase slippage. Large sells are penalized twice: by the tax and by typical price impact on automated market maker (AMM) pools. This design can discourage active trading and large-volume holders, potentially leading to illiquid markets.

Automated redistribution of transaction fees may attract securities regulation scrutiny. Regulators like the SEC may view the promised passive returns as an investment contract (Howey Test). The lack of a formal staking or governance process does not necessarily exempt the token. Projects must consider if the reward mechanism classifies the token as a security in key jurisdictions like the U.S.

The system creates a game-theoretic incentive to hold, as selling forfeits future rewards and incurs a tax. This can lead to reduced sell pressure in bullish markets but exacerbate panic selling during downturns. The "reward" is often paid in the native token, creating inflationary pressure if holders immediately sell their reflections. Effective models may combine reflections with buyback-and-burn or liquidity provision to balance supply.