Automatic supply adjustments and balance changes
Rebase tokens adjust their total supply every epoch (usually nightly) to track a target price or index. If the protocol's underlying asset appreciates, every holder's balance increases proportionally. If it depreciates, balances decrease. The goal is to create a deflationary coin that always returns to a stable peg.
A holder with 1,000 tokens might wake up with 1,050 tomorrow if the protocol rebased positively, or 950 if it rebased negatively. The balance change happens automatically; no transaction is needed.
Why rebases fail at scale
Rebase tokens struggle with price stickiness once they hit secondary markets. If the rebase algorithm increases supply 5% nightly but the market doesn't immediately absorb that new supply, price crashes. Early rebases (AMPL) saw repeated failures to re-peg. The mechanic works better as a thought experiment than in production at scale.