A token designed so that the circulating supply adjusts automatically according to price fluctuations.
What Is Rebase?
A rebase (or price-elastic) token is designed in a way that the circulating token supply adjusts (increases or decreases) automatically according to a token’s price fluctuations. This expansion and contraction is what we call a rebase mechanism.
Rebase tokens are somewhat akin to stablecoins, in the sense that they both have price targets. However, unlike stablecoins, rebase tokens’ have an elastic supply, meaning the circulating supply adjusts accordingly to supply and demand, without changing the value of the tokens in users’ wallets.
Here’s how it works:
A rebase protocol happens routinely. For example, Ampleforth’s AMPL has a rebase scheduled every 24 hours, with a target price of $1. If its price goes above $1, the circulating supply expands during rebase, thereby reducing the value of each AMPL token. Conversely, if the price of AMPL dips below $1, the current supply contracts during rebase, thereby increasing the value of each token.
What happens from the users’ point of view? The amount of tokens in each wallet will increase or decrease accordingly. Yet the total value of each wallet does not change, thanks to the rebasing mechanism.
To elaborate, if Bob has 1 AMPL, which doubles in value to become $2, the supply will inflate during the rebase period. This means that Bob’s 1 AMPL will decrease to 0.5 AMPL, yet the value will still be $1 since 1 AMPLE would now be worth $2.