Yield farming, liquidity mining, and staking have become common practices in the crypto market due to the remarkable growth that the DeFi ecosystem has seen in recent years. These features allow users to earn interest on their crypto holdings by locking them as deposits for specific periods of time.
The concepts sound enticing, but there is a major risk: the potential loss of value of the frozen assets. In other words, users will see losses in US dollars if the asset’s value falls during the lock-up period.
These shortcomings have created “reflection tokens” as a viable alternative. In theory, Reflection Tokenomics eliminates the need to lock tokens, but still offers staking-like benefits.
What are reflection tokens?
The projects that support the reflection tokens impose a penalty tax (calculated as a percentage) on each transaction. In return, they issue the fee to all token holders depending on the percentage of their wealth.
As a result, reflection token holders do not need to freeze their assets for a period of time in order to earn rewards. They earn their income almost instantly in most cases when a transaction is made, with the functions governed by a smart contract.
Image of the reflective marks
In addition, users can deposit their reflection tokens into third-party credit and yield farming contracts for additional yields. But while the combination of holding and staking incentives theoretically reduces selling pressure, most reflective assets have not.
Popular reflection tokens
Some of the most popular Reflection tokens are: SafeMoon (SAFEMOON), BabyFloki (BABYFLOKI), FlyPaper (STICKY), MinersDefi (MINERS) and EverGrow Coin (EGC).
For example, EverGrow Coin (EGC) price fell almost 98% after peaking at $0.0000039298 in November 2021. This project takes 2% of its network fee and distributes it to EGC holders in the form of Binance USD (BUSD) tokens.
EGC/USD weekly chart. Source: TradingView
The EGC weekly chart above shows its bearish price trend accompanied by very low trading volumes, suggesting that buying and selling on its network has eased after the early hype. Less volume means lower rewards for EGC holders, which may have prompted them to sell their assets.
Risks Associated with Reflection Tokens
Reflection tokens give holders the advantage of increasing their passive income with instant reward distributions. However, they pose specific risks that could affect investors’ profitability. Let’s have a look:
transaction tax
Projects charges transaction taxes when users buy and sell reflection tokens. In other words, first-time buyers typically pay a transaction fee that they can only recover if the project is accepted. As a result, it could be months before investors see profits.
Related: Top 5 most googled cryptocurrencies worldwide in 2022
Scam
Scammers can abuse the growing reflection token trend just like any other digital token. They could lure investors into paying initial transaction taxes, only to have the project abandoned midway and flee with all the funds invested.
Unequal Returns
Reflection tokens do not guarantee consistent returns as returns depend on the daily volume of the asset. There is a chance that a token will not generate any revenue if there is no activity on its network.
This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.
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