Understanding Fork-based Tokens in One Article

Kamal531

Fork-based tokens, also known as rebase tokens or elastic supply tokens, are a unique type of cryptocurrency. These tokens share a common feature known as the "rebase mechanism," where the token's circulating supply automatically adjusts dynamically based on the token's price (or the price of the asset it's pegged to). This mechanism is implemented through the token's smart contract and aims to maintain the real value of users' holdings by keeping their token balances in a certain ratio to the total supply.

**Mechanism of Rebase Tokens**

Different rebase tokens have various designs for their elastic supply mechanisms, but they generally follow the same logic: decrease supply when the price falls and increase supply when the price rises.

Take Ampleforth (AMPL) as an example. Ampleforth is a decentralized stablecoin project on the Ethereum network and one of the earliest projects to implement the rebase mechanism. AMPL's circulating supply adjusts every 24 hours, known as a rebase, with the goal of maintaining its price at $1.

Similar to how increasing the supply of a currency through inflation dilutes its asset price, when the price of AMPL exceeds $1, the circulating supply expands during the rebase, reducing the value of each AMPL token. Conversely, if the price drops below $1, the supply contracts during the rebase, increasing the value of each token.

The results of the rebase propagate to all Ampleforth wallets, and wallet balances are adjusted proportionally. It's essential to note that AMPL holders hold a "fixed percentage of the total circulating supply of AMPL" rather than a fixed quantity of AMPL. So, regardless of the rebase, AMPL holders retain the same proportion of token supply in their wallets. From the holder's perspective, the number of AMPL tokens in their wallet changes daily, but due to the rebase mechanism, the total value of their AMPL wallet remains relatively stable.

To illustrate further, let's consider this simple example: Suppose there are currently 100 AMPL tokens in circulation, and you hold 10 tokens, representing 10% of the total supply. If, for instance, the market demand suddenly increases the price of AMPL from $1 to $2, the network will increase the supply of AMPL by 100 tokens during the next rebase. As a result, your wallet's AMPL balance will change from 10 tokens to (100+100)*10% = 20 tokens. However, the theoretical value of your holdings remains unchanged.

While most cryptocurrencies experience changes in their circulating supply, they differ fundamentally from rebase tokens. For example, Bitcoin's supply is predetermined by a fixed algorithm, while the circulating supply of rebase tokens dynamically adjusts based on market prices.

**Limitations of Rebase Tokens**

For users, the primary benefit of holding rebase tokens is the stability of value in a highly volatile crypto market. This stability resembles that of stablecoins, making it attractive to those who need a means of exchange and a store of value in the crypto world.

However, from another perspective, if users seek value stability, why not choose USDT (Tether) directly?

LEASH appeared to offer another benefit of holding rebase tokens: indirectly gaining profits from the price movements of another asset. But regardless of which meme coin—SHIB or DOGE—has more liquidity and a broader audience, if users want the returns of Dogecoin, why not just buy Dogecoin directly?

In summary, the most significant limitation of rebase tokens is that they introduce what seems like a novel approach to providing users with choices they don't necessarily need. Moreover, due to their novelty, they are less user-friendly and less accessible in terms of conceptual understanding, further limiting their development.