What Are Reflection Tokens and How Do They Work?
Reading Time: 3 minutesReflection tokens are a new way to earn passive income in the DeFi world. Here’s how it works.
There are many ways to earn money in the decentralized finance world. Many people trade and also explore different forms of passive income. Holding reflective tokens is becoming a popular solution for earning passive income. Understanding how they work may interest you to utilize them as a means of generating passive income.
What Are Reflection Tokens?
Reflection tokens are also known as reward tokens because they earn you additional crypto in your wallet for owing them. They are becoming popular because of their appealing reward system to holders since you get rewards as long as you hold them without having to do anything else.
Reflection tokens provide a unique passive income solution because they do not require you to lock your funds for specific days, as do other similar decentralized finance solutions. Examples of reflection tokens include SafeMoon, Reflect Finance, EverGrow Coin, Miners DeFi, BabyFloki, and Tiki Token.
How Reflection Token Works
Let’s say there is a 10% tax on every transaction executed with a reflection token. If you buy the token, you will be charged 10% of the total tokens you buy. The percentage charged would be redistributed across different channels, which include the token holders.
The 10% charge means that the total token you would receive would be 10% less than the amount of tokens you paid for. However, the buyer gets to recover the money over time since most buyers’ goal is to continue to hold the token for a long time.
The reward is often based on how much you are holding. That is, the more tokens you hold, the higher the percentage of the transactional fees you get as a reflection. The rewards could be in stablecoins, popular cryptos, or the native token you hold.
The whole transactional tax is not redistributed to the holders. Some percentages go into other things. A certain percentage of the reflections could cover some marketing costs, some could be donated to charity, and a percentage could also be burned to reduce the token supply.
Advantages of Reflection Tokens
Reflection tokens help stabilize a coin’s supply. Since earning some percentage on every transaction encourages holders to hold on to them, it helps with the coin’s stability, supply, and distribution. Thus, investors are encouraged to stay loyal.
The likelihood of large price drops is reduced because large fund holders will be less eager to sell their positions due to the transactional tax. This also, in theory, ensures price stability to some extent.
Reflection tokens also help to keep the reflected token in circulation since many people will be holding it for a long time as long as they keep earning.
The solution increases the way investors can earn in the decentralized finance industry. You don’t have to do anything other than hold the token. The token distribution is accurately carried out accordingly with the use of smart contracts.
Drawbacks of Reflection Tokens
The tax affects the buyers, and they have to hold their tokens for a while before they can cash them out. Selling their tokens immediately after buying means that the seller would have to make a loss unless the token had a significant rise in price before it got sold.
The crypto market is volatile, and there are possibilities that the value of a reflection token will decline, which can affect your balance or cause a big loss.
Reflection tokens have not been around for too long. Therefore, there may be some risks to it that have not been widely noticed.
Do Your Own Research
Reflection tokens provide passive income, and many crypto projects use the strategy to attract users and investors. However, it has not been around for too long; as a result, it has not passed the test of time.
Make sure you do your research before buying any reflection tokens. In addition, before committing money to any cryptocurrency, do research and be convinced about its legitimacy and prospects. In all, never invest more than you can afford to lose, no matter how promising a project seems.
Reference: https://www.makeuseof.com/reflection-tokens-and-how-it-works/
Ref: makeuseof
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