In this article, I’ll tell you what reflection tokens are, how they work, and the benefits and risks associated with reflection tokens.
If you have been seeking an investment option that requires less work, this might be it.
However, as much as it is easy to make profits with reflection tokens, there is also a high chance of losses.
So, read this article to the end to know if this investment option is for you.
- What Are Reflection Tokens?
- How Reflection Tokens Work
- Benefits And Risks Of Reflection Tokens
- Should I Invest In Reflection Tokens?
What Are Reflection Tokens?
Reflection tokens are tokens of projects that charge a penalty tax for every transaction. The tax collected is then distributed to the holders of the token.
If the word “tax” makes you uncomfortable, think of it as fees charged for transactions completed on the network.
That is to say, participants pay fees for either buying or selling the token. Then, the fees are distributed among the holders of the token.
So, you get paid for simply having the token in your wallet. Cool, right?
They are called reflection tokens because rewards are distributed based on the activities on the network and the number of tokens held by the user.
In other words, the rewards you receive are a reflection of the activities of the network and the number of tokens you hold.
Also, the main purpose of reflection tokens is to remove “sell pressure” and inadvertently boost the value of the asset.
Buyers of the tokens are encouraged to keep holding them to continue receiving rewards from transactions on the platform.
Let’s see how reflection tokens work in the next section.
How Reflection Tokens Work
Basically, they make use of smart contracts which define how the transaction tax or fees will be distributed.
Now, projects have different channels for distributing these fees. Usually, it is shared in the form of the native token of the project. Other channels are:
- Another token: the fees may be used to purchase tokens of a different network which are then shared among holders.
- Pegged stablecoin: the stablecoin linked to the platform may also be bought and distributed to holders e.g. EGC distributes rewards in the BUSD stablecoin.
- Burn wallet: again, the fees collected may be burned to reduce the circulating supply of the token and improve its price.
- Staking pool: also, some projects lock up the tokens in a pool to keep them out of the market and maintain their value.
- Liquidity pool: depositing the tokens into a liquid pool helps to maintain a stable price and keep them liquid.
Note that projects may combine two or more channels to distribute their tokens.
For example, the SAFEMOON reflection token charges a 10% tax on all transactions.
5% is distributed to token holders; 2.5% is used to purchase BNB which is then paired with the rest 2.5% in a liquidity pool.
Other popular reflection tokens are EverGrow Coin (EGC), Baby Floki (BABYFLOKI), FlyPaper (STICKY), MinersDefi (MINERS), etc.
And you can buy them from top exchanges like Bitget and Gate.io
Also, you’ll hold the tokens in a private wallet like MetaMask or Trust to receive your rewards.
Moving on, we’ll look at the benefits and risks of reflection tokens.
Benefits And Risks Of Reflection Tokens
a. The first benefit of reflection tokens is instant rewards. Holders do not have to wait for a long time to receive rewards but as transactions happen on the network, rewards are sent to their wallets instantly, almost like a reflex action. 😄
b. This investment option is hassle free. You are not watching the market to know when or when not to trade; you just leave the tokens in your wallet and continue receiving rewards.
c. Because the tokens remain in holders’ wallets; the market value is stable, reducing the risk of losing the value on your holding.
d. Another benefit of reflection tokens is that the value will likely increase overtime. Investors are encouraged to buy more and keep holding, so, no sell pressure but increased demand.
a. To get started, you’ll pay the penalty tax to purchase the tokens. If the project does well and gains more adoption, you’ll make that money back and more. Otherwise, you’re stuck with your loss.
b. Another risk associated with reflection tokens is that the value of your holdings will drop if the underlying project doesn’t do well or the general crypto market is down.
c. Perhaps it is a scam project, you’ll end up losing money in purchasing tokens that will just sit in your wallet, without receiving any rewards once the project folds up.
Gratefully, the benefits outweigh the risks. So, should you go ahead and invest in reflection tokens? Read the next section to know what I think.
Should I Invest In Reflection Tokens?
Well, if you are a long-term investor, reflection tokens can be a solid investment because you’ll keep receiving rewards throughout the lifetime of the project.
However, you must bear in mind that:
- the token may decline in value;
- early investors benefit more because as the network gets saturated, the amount of reward each holder receives is reduced
- it may take a while to recover the tax you paid to purchase the tokens once you start receiving rewards since it is a reflection of network activities and the number of holders.
- the less number of token holders and more network activities, the more the rewards
- on the other hand, the more number of token holders and fewer network activities, the fewer the rewards
Nevertheless, the concept of reflection tokens is still new and there may be improvement in the future that may guarantee consistent high rewards.
For example, some networks like XEN, plan to create reflection tokens that will be pegged to another token on their networks to boost utility.
So, with added utility, the reflection token remains valuable other than waiting for the public to buy and hold the tokens.
I hope that makes sense. Feel free to ask me any questions in the comments section below.
Reflection tokens are tokens that reward you for holding them in your wallet. The reward can be in the same token, a different token, or a stablecoin.
Investing in reflection tokens allows you to keep earning rewards throughout the lifetime of the project.
It is a hassle-free investment option and best for long term holds. With technological advancement, it could get easier and more profitable in the future.
Nevertheless, you want to buy tokens of reliable projects to avoid being scammed.
Also read: Deflationary Tokens – The Complete List (2022) | What Are Deflationary Tokens?