Oct 29, 2020

5 min read

Rebasing for Smol tings: A Simplified Guide

Photo by Austin Distel on Unsplash

Although Debase is designed to overcome some of Ampleforth’s core limitations, it is indebted to Ampleforth for the idea of an elastic supply change mechanism. This mechanism allows Debase’s supply to be changed according to the current market demands.

That is, when demand is high more coins can be minted and when demand is low, total coin supply can be contracted. To understand rebases, it’s imperative first to understand why an elastic supply change coin needs to exist.

Smol History Lesson
Cryptocurrencies have volatile price histories. To overcome this instability, many Fiat like stable coins launched (Tether, USDC) where the number of tokens is backed by the same number of USD locked in these project’s bank vaults. Such centralization goes against the normative ethos of cryptocurrencies. Additionally, increasing regulation is on the horizon for such stablecoins and such coins that do not leverage decentralization for regulatory arbitrage are an easy target.

Thus, collateral-based stable coins were launched (DAI, SUSD), where ETH was deposited to power a certain amount of DAI according to a certain collateralization ratio. The issue with these tokens are a reduction of your buying power since you will have to lock in more value than you can borrow and market crash events would mean your collateral is revoked (ETH crash).

Then came a new breed of tokens that didn’t require locked collateralization and instead used algorithmic manipulation to stabilize the coins to its peg amount by contracting and expanding its total supply. This is where we are.

rebasesPhoto by Dan-Cristian Pădureț on Unsplash

How this works

Assume there are 1000 Debase tokens in existence before a rebase, and the coin’s current market price is $2, while its target price is set at 1$/1 Dai.
Considering the price is off by 1$/1 Dai, Debase coin is overvalued by 1$. What can be done to induce a correction in the price is to inflate the tokens’ supply, which, in theory, decreases the tokens’ value.

Therefore, Debases supply is increased to 2000 tokens to induce a sell-off pressure. The same but opposite logic would apply when Debase is priced at 0.5$/0.5 Dai. By decreasing the tokens, you induce scarcity, which can help to increase the price.

This is how rebases function in theory, but it brings up a question.

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Understanding dilution

If Debase and elastic supply tokens at large followed real-world Fiat models, all supply changes in Debase would dilute the token holder’s coins. For instance, if 1000 tokens were put into the supply, they would be spread out unequally, thus causing an uneven evaluation with regards to selling or holding the token. If Bob gets 100 new tokens from the supply change, and Lisa gets 900, Lisa gets a better incentive to sell, earns more profit.

To combat this issue, Debase is non-dilutive. Even though Debase’s supply is increased or decreased, the percentage share of a coin holder in the total supply always remains the same.

So say before the rebase you have 50 of the 1000 Debase tokens available. Meaning you owned 5% of all Debase tokens. So after the supply jumps to 2000, you will still own 5% of all Debase tokens. So now your new “balance” will be 100 Debase token even though it seems like you are getting new tokens for no reason. You will always have the same share in the % of all Debase tokens available.

The same but opposite logic applies when 500 tokens are removed from a 1000 token supply to account for the price being below the target price. If before the rebase, you own 10% of all coins so 100 Debase. Then afterward, you will still hold 10% of all tokens to 50. Even though your token supply is decreasing, your market share remains the same.

This mechanism is used to help move the market equally to the target price, thus in theory helping stabilize the coin over the long term.

So in summary, when you buy Debase, you are buying a % share in the network represented by tokens. Debase’s protocol increases or decreases the network size but you always own the same % of the network.

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Don't look at the price Scotty

With this in mind, it must be understood Debase’s main goal to eventually stabilize to its target price currently set at $1/1 Dai. Which doesn’t mean Debases value would be $1 in the short term.

As demand for Debase increase, so will its price. This, in turn, will cause its supply to increase. So if you are early to debase and own 1% of the network when the supply is just 100,000 token at 1 dollar a token, when the market cap of debase grows by a factor of 10, the value you hold will grow by the same factor.

Debase wants to accrue a bigger market cap so it can eventually stabilize to its target price. This is just one of the strategies Debase will use to stabilize itself, more details on other techniques are coming soon.