Negative Rebase Mechanics

Negative rebase mechanics represent the deflationary phase of a rebase protocol where the circulating supply is reduced to combat downward price pressure. When the market price of the token falls below the target peg, the smart contract triggers a contraction to restore the intended value per token.

This process involves reducing the token balance of every holder by a calculated percentage, ensuring that the total market capitalization remains consistent with the target price. While this maintains the relative ownership percentage of each user, it can be confusing and often creates significant negative sentiment among participants.

The goal is to discourage selling and incentivize holding by aligning the individual token count with the broader protocol health. Effective implementation requires transparent communication and clear smart contract logic to ensure users understand why their balances are decreasing.

These mechanics are essential for protocols that lack collateral backing and rely solely on supply control to maintain value.