DeFi (decentralized finance) is the core of crypto’s fastest-growing projects right now. DeFi tokens like YFI allow investors to make extra income through their crypto holdings. In practice, the process is a lot more complex.
Enter reflection tokens. This new breed of crypto substantially simplifies the process for investors to make passive income from their investments. Reflection tokens are attracting experienced crypto traders fast, and also allow crypto newcomers to join without learning about yield farming, staking, and liquidity mining.
So what is crypto reflection meaning and how do they work?
Crypto Reflection Meaning
Reflection tokens (sometimes called ‘rewards’ tokens’) refer to any crypto-asset that rewards holders by adding new crypto to their wallets. Earning extra crypto is the end goal of other DeFi investment mechanisms like staking and yield farming. However, reflection tokens pay token holders without them having to move any money, sign up to any staking pool, or even having to check their crypto wallet.
The model prevents whales from easily manipulating and exploiting small-cap DeFi projects because of their usually astronomical token supply and reflection token mechanics. As part of this strategy, early participants are discouraged from dumping their tokens early during the price discovery phase.
How Do Reflection Tokens Work?
Reflection tokens use a static reward system, which means that any transactions involving these native tokens will incur fees. A percentage of the proceeds for every transaction will go into a liquidity pool and another percentage will be allocated among token holders, most often according to the size of their holding.
Due to this, the tokens have an intrinsic value and are designed to encourage a ‘hold and earn’ approach, thereby reducing selling pressure. A reflection mechanism is executed through smart contracts, automating token distribution across holders, liquidity pool, and a burn wallet, requiring token holders to keep hodling these tokens in their wallets to receive their rewards.
Reflection Tokens Examples
- Safemoon (SAFEMOON). Safemoon launched just over a year ago and was one of the first reflection tokens in the crypto industry. The project has won over 2.5 million holders with a market cap of $2 billion. Safemoon’s smart contract charges 10% on top of any SAFEMOON transaction, with 5% distributed to investors and 5% going to Safemoon’s liquidity pool.
- EverGrow Coin (EGC). EverGrow Coin only launched in September last year but broke records on the BNB Chain for rapidly gaining investors through a unique reflection system. EverGrow Coin charges a 14% tax on EGC transactions with 8% instantly distributed to investors. However, EverGrow Coin does not reward token holders in its native EGC token (like SAFEMOON). Instead, EverGrow Coin pays out reflections in the stablecoin Binance USD (BUSD). EverGrow Coin has paid over $35 million in reflections within 5 months and is developing new applications (like the world’s first crypto-integrated content subscription platform, Crator) to generate even more rewards for loyal investors.
- Reflect Finance (RFI). RFI is a reflection token on the ETHereum network. It applies a 1% fee to RFI transactions which are automatically distributed among coinholders. The amount is dependent on the size of each investors’ position. RFI holders can also use their tokens for yield farming or staking without damaging RFI reflections.
Benefits Of Reflection Tokens
The Hold and Earn mechanism addresses selling pressure and excessive price movements and offers benefits to earn yield without staking. Other key issues addressed by the Hold and Earn mechanism include:
- DeFi yield generation: The Hold and Earn Mechanism awards bonuses, allowing holders to use their tokens to earn staking benefits without staking them and for other yield generation purposes.
- Fair distribution of earned tokens: The distribution process is automated, so it depends on how many tokens each user holds at any given time.
- No Staking: Each altcoin project aims to incorporate a unique approach to earning yield by investing in it. The Hold and Earn Model enables holders to earn yield for holding, eliminating the need to stake their crypto.
Risks Of Reflection Tokens
- Most projects currently utilizing reflection mechanisms are meme coins and do not have a sound business model.
- Reflection tokens are still a new concept and haven't been tested well enough.
- The high transaction fees of most reflection tokens make them a bad choice for transactions.
Are Reflection Tokens Safe?
Reflection tokens provide a new way of earning passive income that is yet to stand the test of time. Most of the cryptocurrencies using reflection mechanisms are new, considering they haven't been around for more than a year. Since they are a very new asset in the cryptocurrency space, the amount of crypto scams and potential rug pull projects need to be a concern.
Making a decision to buy reflection tokens should be based on a user’s risk tolerance level - are they ready to take on the risk of investing in a fairly new promising model or do they prefer to observe the long-term effect on the market before investing any money? While there’s no direct answer to this question, the rule of thumb before investing in any tokens is to do due diligence by conducting thorough research about the project.
Closing Thoughts
The purpose of reflection tokens is to help generate passive income and loyalty through the redistribution of rewards. While the concept of reflection tokens may be enticing, the projects themselves are new – most reflection tokens aren’t in the top 100 cryptocurrencies by market cap and are viewed as memecoins.
Hence, it is extremely important to do your own due diligence before investing in any reflection token. Hopefully this article has provided a strong base understanding of crypto reflection meaning and how they work, for you to be able to dive deeper into tradeoffs and determine if it’s worth an allocation in your investment portfolio.
