Rebase protocols like Ampleforth and OlympusDAO are becoming increasingly popular in Web3 as they offer a relatively new decentralized financial product.
What is a rebase protocol?
The purpose of a rebase protocol is to adjust the supply of a cryptocurrency to maintain a stable value relative to some external reference. This is typically accomplished by increasing or decreasing the supply of the cryptocurrency in response to changes in the reference value.
Rebase protocols can be used to maintain the stability of a cryptocurrency’s value, which can be useful for facilitating use as a medium of exchange and store of value. However, rebase protocols can also be complex and may require careful design and implementation in order to work effectively.
There are many different rebase protocols that are available with their own interpretation surrounding rebase interval frequencies and external value references.
The Ampleforth (AMPL) Use Case
The Ampleforth protocol is a rebase protocol that adjusts the supply of the Ampleforth cryptocurrency (AMPL) in response to changes in its price relative to a reference value. The reference value is called the “target price,” and it is determined by the protocol based on the supply and demand for AMPL.
When the price of AMPL is below the target price, the protocol increases the supply of AMPL in order to decrease the price. Conversely, when the price of AMPL is above the target price, the protocol decreases the supply of AMPL in order to increase the price. The goal of the rebase is to maintain the price of AMPL within a certain range relative to the target price.
The OlympusDAO (OHM) Use Case
The OlympusDAO is a rebase protocol that adjusts the supply of the Olympus cryptocurrency (OHM) in response to changes in its price relative to a reference value. Similar to Ampleforth and many other rebase protocols, the reference value of OHM is determined by the protocol based on supply and demand for OHM.
Unlike other rebase protocols, the Olympus protocol incentivizes users to stake their OHM to receive the derivative pOHM. If a positive rebase occurs on OHM, holders can redeem more pOHM. The value of pOHM is worth one OHM minus the intrinsic value. When one sells their pOHM, they are initiating a burn event and subsequently minting OHM.
Reporting For Rebase Protocols
Web3 evolves significantly faster than reporting guidance and accounting standards do to accommodate the innovations surrounding new digital financial products, including that of rebasing protocols.
The key points here is to decide when to report the rebasing assets as income. There are two methods that can be used, an aggressive and a conservative method.
Below is an example of a conservative and aggressive income reporting method in the context of Olympus.
Conservative: pOHM is reported as income based on the fair market value of your staked tokens at the time of acquisition.
Aggressive: OHM is reported as income only after the transfer between pOHM to OHM through the burn and mint process.
The underlying assumption regarding the conservative method or viewpoint is that incoming pOHM transactions are treated as income and the transfer from pOHM to OHM is considered a taxable disposition (crypto-to-crypto).
The underlying assumption regarding the aggressive method or viewpoint is that incoming pOHM transactions are NOT treated as income but instead treated as a traditional stock split (non-taxable) once the pOHM-to-OHM token transfer is complete.
There could be variations of these assumptions depending on the jurisdiction and how crypto assets are taxed. For example, in France if you were to use the conservative method for treating pOHM then the income would be reported but the transfer from pOHM-to-OHM would be a non-taxable disposition as crypto-to-crypto trades are non-taxable in France.
Reporting Differences Between Rebase Protocols
Reporting for other rebase protocols like Ampleforth (AMPL) is completely different to the point where the conservative and aggressive reporting method would be irrelevant and non-applicable. With AMPL, there is no staking of the token to maintain price stability as you would see in OlympusDAO.
Instead, the price stability is maintained by the rebasing that occurs from the AMPL assets held in user wallets. This perpetual state of rebasing at the wallet level means reporting for AMPL exists outside of the scope of the conservative & aggressive reporting method. AMPL would simply be reporting by the fair market value and not as income as no staking is occurring.
There are however intermediaries that enable the generation of income using AMPL assets. For example, users can generate income with AMPL assets through rebase arbitrage.
Let’s say that 1,000 AMPL are borrowed on the AMPL pool through AAVE, there would be an incoming transaction event of 1,000 AMPL into your wallet though you would also be held liable of a 1,000 AMPL debt. If a positive rebase event occurs, you would be able to repay your 1,000 AMPL debt plus the interest and pocket the difference. The profits made on the rebase arbitrage trade would be reported as income.
In conclusion, always make sure you are aware which reporting methods apply based on your jurisdiction and never assume that if one reporting method works on one protocol that in can also work for another.
Comprehensive tools like Cryptoworth are essential to automate most of the accounting related to rebase protocols. Due to the complexity of many DeFi products like rebasing protocols, capable tracking systems greatly shift the reporting burden through effective ledger management.
No Professional Accounting Advice or Financial Advice Disclaimer
The information provided on this article does not constitute accounting advice, tax advice, trading advice, or any other sort of professional financial advice and you should not treat any of the content as such. We strongly advice to conduct your own due diligence and consult your financial advisor(s) before making any decision based on information provided by this article.
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