A rebase(DAO) token is also known as an elastic supply token in its most basic form. This means that a price target exists. The protocol can adjust its daily circulating supply in line with supply and demand to reduce volatility. For instance, assume a rebase token with elastic supply wants to keep its value at $1. (price target). Tokenomics would increase the current circulating supply if the price increased beyond $1, increasing the supply of the token and reducing the price back down to $1.
If the price of the rebase token drops below $1, the opposite side would be applied. Investors would receive less tokens and the circulating supply would inflate, bringing the price back up to $1.
Rebase tokens: Pros and Cons
Remember that amplified loses on the downside relate to amplified gains to the upside. Rebases that take place as the token price is falling cause you to lose money from both the declining token price and the fact that you will eventually own fewer tokens overall.
Here's an example: if the price of the rebase token increases along with your token holdings, you are receiving a double whammy and winning double. The downside, though, is the same. The protocol loses money if the price starts to decline. Due to the lower rebase rewards that result, there would be fewer tokens and less price action, which would be a double whammy.
The vast majority of cryptocurrency projects are largely just hype and community sentiment. One of the most recent trends to hit DeFi was rebase tokens. Investors in cryptocurrencies are frequently seduced by the excitement and promises of exponential gains. However, it's important to understand the above implications and analyze the safety of a potential investing strategy.
There are projects working on creative answers to the delicate problems rebase DAOs are facing, so not all is lost. Projects with unique value propositions that are based on strategies for sustained market growth are what we are seeing.
