Xodus Fixing the Pain Point of Rebase Tokens
As you might know by now, Xodus Finance is a decentralized financial protocol aiming to offer both sustainable and attractive APYs by simply staking and holding assets. The end game of Xodus is the mass adoption of cryptocurrency. Thus, hastening the legitimization of digital currencies and platforms, and enhancing transparency and security. It also offers profitable opportunities to its community, presenting the members with innovative mechanisms that can guarantee success.
Xodus tokens, the XOD, unlike your regular tokens, do not have a fixed token supply i.e. they have an elastic supply, hence called rebase tokens. As an indicator, the demand and rate of the assets are what generally determines the supply. With an elastic supply, it is possible to mint new tokens and also remove them from the circulating supply.
In broader terms, rebasing is an adopted solution that implements algorithms to achieve its operations.
Dilution — A Major Pain Point for Rebase Tokens
At the moment, major rebase tokens are known to provide investors with insanely high APYs that range from the thousands to millions of percentage points.
During the process of rebasing, there’s a certain increase in the market capitalization of rebase tokens.The only downside for most of these rebase tokens is that such growth is not supported by any substantial increase in the treasury, hence, resulting in dilution.
More so, extremes in APYs have resulted in community members being negatively affected, bringing about market volatility and unsustainability, with severe profit loss.
Understanding Dilution in Crypto
To grasp how dilution is a pain point for rebase tokens we take a look at what dilution means in crypto terms. One of the many ways of calculating market capitalization is getting an estimation of the future value of a network. This method is termed “The Diluted Market Cap”
Originally, the term originated from the stock market, where it describes a figure representation of a company’s valuation when all stock options are exercised and all securities are also converted to stock
In addition, it is important to note the current and future supply of a crypto asset even though some cryptocurrencies don’t provide their entire supply at once.
For instance, virtually all crypto investors are aware that the maximum supply of bitcoin is 21 million. However, for example, if the current bitcoin supply in circulation is 18,971,887.00 BTC with a price of $44,063.38 per 1 BTC, it gives a market cap of about $837,133,108,544 as of March 2, 2022.
To calculate the diluted market cap, we would have to account for the maximum supply of Bitcoin. As such, the total Bitcoin supply is multiplied by the BTC price of $44,063.38. Thus, the outcome of the calculation is seen as the diluted market cap of Bitcoin and that is about $926,253,019,556. Bitcoin is one of the coins that is seen as dilution-proof.
At the same time, the concept behind the diluted market cap of Bitcoin can be applied to all crypto assets. This means to get the diluted market cap of an asset, simply multiply the asset’s current price with its maximum supply.
However, as we know that crypto assets’ prices are ever volatile and as such, the diluted market cap is not the most precise metric but it can help indicate if an asset could be overvalued or undervalued in the future.
When we relate this to the stock market, it becomes even clearer why dilution is an issue here. The process of dilution takes place when an organization’s new share issue reduces the present stockholders’ ownership percentage of the company. Stock dilution is also possible as a result of stock options holders like company employees, or other optionable securities holders exercising their options. With every increase in outstanding shares, each existing stockholder is left with a smaller/diluted percentage of the company. This makes each share less valuable.
So, you see, for a rebase token, dilution occurring reads danger because it could be an indication that the token could be on its way to lesser value. As we have mentioned before, dilution mostly occurs when there is extremely high APY that is not substantially backed by an increasing treasury.
Xodus Offers Proper Structure to Combat Dilution
In the strive to arrest a major pain point for users when it comes to rebase token, the Xodus Finance protocol is implementing an aggressive dilution control that involves the introduction of sustainable APY percentage and a 15-day warm-up on staking. Earlier, we talked about the importance of treasury to controlling dilution. Xodus will have a treasury that holds both digital and real-world luxury assets that can add immense value to the XOD token, preventing it from being undervalued in the future.
As opposed to other protocols in the same category, Xodus will use minting to raise funds and build up the treasury against the future. The initial focus will be on minting sales to sustain the starting APY. By the time the treasury is stabilized, the protocol will explore the option of pausing minting and reducing the APY to a realistic value derived by an algorithm.
The model employed by Xodus allows for long-term planning in which a part of the treasury funds is used to buy products backed by real-world assets. One thing about real-world assets is that their appreciation rate is less volatile and slower than digital assets. This allows Xodus to come up with a more sustainable albeit lower APY.
A large portion of the treasury will still go towards participating in the Liquidity pool, Proof of Liquidity (POL), Nodes as a Service (Naas), and much more. This way stakers on the Xodus protocol too can gain from the appreciation of digital assets and real-world assets subscribed to by Xodus.
You will discover that Xodus has pointed out several plans it has to strategically build its treasury against dilution that seems to terrorize rebase tokens.
Fighting Dilution Through Value Creation
It goes further down here; Xodus highlights its treasury as a multi-sig protected safe that has three primary functions and they are value creation, digital investments and tangible assets.
Creating value is one of the ways to ensure that the XOD token maintains value and continues to appreciate in the future. How does Xodus plan to achieve that? Minting- yes, we have talked about it earlier. Minting is one of the primary means of generating profits for stakers on the XOD network. Buying the XOD token is done either through the treasury at a discounted price or via DEXs. The discounted XOD token is available to the minter after a 5-day vesting period, and the tokens can be claimed at each rebase done every 8 hours.
There is something about rebase tokens, which keep investors’ eyes glued to them. It could be the fact that although similar to stablecoins, rebase tokens have a way of delivering appreciated value to investors, unlike stablecoins that have their value forever pegged to their underlying assets.
However, the concerns with rebase tokens, one of which is dilution could make investors and users wary of these types of tokens. This is something Xodus hopes to change with its unique qualities such as sustainable APY and aggressive dilution control.