Pass tokens: naline singh explains this new financial instrument and the pros and cons of using them.
decentralized finance (or DeFi for short) allows users to trade directly with each other via an algorithm; this algorithm is known as a smart contract. Instead of a broker or a bank, DeFi it will become the standard in the very near future.
DeFi promises more affordable and direct access to financial services such as earning interest, lending, buying insurance, derivatives trading, asset trading, and much more. And, DeFi has seen exponential growth in recent years. This is due, in part, to its return on investment (ROI) optimization strategy, staking.
What is gambling?
Staking is an increasingly popular cryptoeconomic model for efficiently scaling the security of decentralized systems. Staking is the act of locking up cryptocurrencies to receive rewards; this requires holding digital assets in a cryptocurrency walletwhich helps make the underlying blockchain of that asset more secure and more efficient (also known as Proof of Stake or POS).
In return, stakeholders (i.e. investors) are incentivized with rewards for participating in the health and longevity of the project. There are many cryptocurrency projects, including Olympus DAO, Wonderlandand other ohms Forks – that base their main growth strategy on participation.
Exceed staking rewards
There are several ways a project can distribute staking rewards to investors. Olympus DAO and its countless forks, such as Wonderland, have used a specific distribution method in the form of rebase. Investors in these projects are required to stake their tokens and in return receive a representative token that accumulates overflows. These tokens are called rebase tokens.
In the case of Olympus DAO, staked OHM (its native token) becomes gOHM and for Wonderland. TIME becomes MEMO when you bet. For these projects, rebases are assigned at the end of each epoch (or unit of time), which is typically every 8 hours. With frequent epochs, these overshoots add up quickly and can lead to returns of up to 30,000% per year or more, attracting APY hunters looking for ridiculous returns.
Rebase Tokens: What Exactly Are They?
In its simplest form, a rebase token is also known as an elastic supply token. What this means is that there is a target price. According to supply and demand, the protocol can change its circulating supply daily to achieve less volatility. For example, suppose we have an elastic supply token (ie a rebase token) that wants the value to remain at $1 (target price). If the price rises above $1, then the tokenomics (i.e. the token economy) would inflate the current circulating supply, so the supply of the token would increase, driving the price back down to $1.
The opposite side would apply if the price of the rebase token falls below $1. A deflation in the circulating supply would occur and investors would receive fewer tokens to push the price back up to $1.
High Rebase Reward
Currently, most Olympus forks offer extremely high APYs to investors. These APYs can range from 50K to millions of percentages. At the time of the rebase, the market capitalization of the rebase tokens increases. However, the increase is not supported by any substantial growth in the treasury. This leads to a dilution, which can be temporary if stabilized by arbitration.
This scenario causes downward selling pressure as the tokens are minted and their treasury pegs them to $1. However, the same $1-backed tokens are sold on the open market for market value, exerting a strong downward selling pressure on the price of the underlying token.
Rebase Tokens: Who Controls Them?
Most rebase tokens are run by Decentralized Autonomous Organizations (DAOs): a DAO is an entity with no central leadership. Decisions are made from the bottom up, governed by an organized community with a specific set of rules applied on a blockchain.
Staking rewards are a profit distribution mechanism that uses the rebase token, which simply means that the profits that the treasury generates are distributed to stakeholders.
Let’s take the example of Olympus DAO: “The protocol distributes tokens by sending them to the participation contract without requesting the return of sOHM. This increases the ratio of staked OHMs to outstanding sOHMs and results in a rebase to correct the difference. For example: there are 500k OHM staked and 500k SOHM pending. The protocol produced a profit of $5k per day, which it uses to mint and back 5k OHM. Send those OHMs to the stakeout contract; there are now 505k OHM staked and 500k sOHM pending. The sOHM supply must increase by 5k, or 1%, to return to equilibrium. Therefore, sOHM appreciates by 1%.”
What about the absurdly high wagering rewards, also known as APY?
In short, those high APYs aren’t always accurate, as it depends on how much the treasury is making profits. Whatever the treasury makes in profit is what is distributed among the stakeholders, and in general, the main purpose of rebase DAOs is to improve the treasury.
Once you have a larger treasury, you can earn more in a day and send more tokens to those participants as a reward. Obviously Olympus DAO, OHM is the most popular rebase token and most rebase tokens are Olympus DAO forks, but most staking rewards work and work like that.
Rebase tokens are still very experimental and there are a lot of risks involved. According to Binance, “Elastic Supply Tokens are highly risky and extremely dangerous investments. You should only invest in them if you fully understand what you are doing. Remember, looking at price charts won’t be that helpful, as the number of tokens you own will change after rebases happen.”
What they are saying is that the rebase token price data is not that important. The fact is that they can manipulate the price data in any way they want because they have full control over the circulating supply. What is the purpose of the rebase token: to make the charts look much better, which entices investors to bet on them.
Rebase tokens: pros and cons
This obviously increases the rebase DAO treasury, which in turn increases the investor’s rewards. But keep in mind that gains amplified to the upside are mirrored by losses amplified to the downside. If overshoots occur while the token price is going down, you will not only lose money from the falling token price, but you will also have fewer and fewer tokens after each overshoot.
Here is an example, if the price of the rebase token is going up and the number of tokens you have is going up, then you are getting a double whammy and you are winning twice. However, the same applies to the downside. If the price starts to drop, the protocol makes less profit. This results in lower rebase rewards, meaning you would have fewer tokens and less price action, so it would be a double hit to the downside.
The vast majority of crypto projects have little to no value except community sentiment and hype. Pass tokens they were one of the most recent trends to hit DeFi. As cryptocurrency investors, we are often lured by hype and promises of exponential profits. However, it is important to understand the above implications and discuss the security of an investment solution.
It’s not all doom and gloom, there are projects that are working on innovative solutions to the vulnerable issues facing rebase DAOs. We are seeing projects with unique value propositions that are based on sustainable growth strategies in any market condition.
Oracle Financial Solutions
Oracle Finance they have set out to create value for their investors by developing several unique investment channels within their platform. Your goal is to grow your treasury and use the funds to effectively expand the value of ORCL, your native token. They are based on the limitations of rebase tokens by removing APYs entirely.
Oracle Finance has moved away from the inflationary backing of $1 per token. Instead, the tokens will be backed by your treasury, where the total number of stablecoins in the treasury corresponds to the total project token. The objective of the protocol is to use the treasury funds and build an ecosystem such that the net inflow in treasury compensates for the decrease due to the distribution of rewards. This will create a passive yield-generating coin, with an ever-increasing floor price.
Their platform has been designed on the basis of sustainability that will generate profit from various channels of distinctive investment opportunities for the user. Although investors will not have the option of APY, they will have plenty of options to grow their portfolio.
Oracle Finance is creating solutions that generate a constant flow of funds to your treasury without putting investors at risk. It is a financial platform that facilitates a multitude of cryptocurrency investments and value creation by creating a treasury-backed, yield-generating currency for the next billion users. The goal is to empower the investor and make it as easy, efficient and quick as possible to manage their assets, lend and borrow, earn interest on staking and pegging, cross-chain bridging, launchpad for new projects including NFTs, and much more.
Food to go
For long-term sustainability, it is my opinion that the rebase reward model should be deprecated. Projects can still offer an attractive return on investment for their investors by increasing the value of their token through solutions that enable treasury growth and thus market capitalization. Now that you understand the high risk that rebase tokens carry, it’s up to you to do your due diligence and avoid the crypto hype-wagon. In fact, it is advisable to investigate less risky investment opportunities. But what it really comes down to is deciding if you’re in it for the quick wins, or if you’re in it for the long-term, sustainable rewards.
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