Pros and cons of interest bearing elastic supply (rebase) tokens

External question — Ethereum Stack Exchange Author: origaminal Original post: https://ethereum.stackexchange.com/questions/132432 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Single asset vaults usually choose from 2 types of tokens that represent user shares. Tokens pegged 1:1 to underlying assets employing the rebase architecture . When underlying asset volume grows then the supply of such tokens is increased to hold 1:1 peg. Examples: AAVE's aTokens, Overnight's USD+; Constant supply tokens representing user's share of a vault. When underlying asset volume grows then the token supply remains the same but the peg of the token to the underlying assets naturally increases. Examples: Compound's cToken. What are the pros and the cons of the elastic supply tokens? From the usability standpoint: When a rebase token is provided to liquidity pools do additional difficulties emerge for the pool to preserve the interest for the user? When an exact amount of a rebase token is sent to a recipient does the one get this precise amount? Actually behind the scene what is transferred is the principal – does rounding errors appear? Also an additional interest gets accrued after the transfer which could bring difficulties to the accounting. Is there any bad experience around accounting on a rebase token? From the engineering standpoint: The rebase architecture brings additional complexity. What are gas spendings implications? Are there any limitations on such architecture? What functionality is impossible to be implemented for a rebase token?

External answer — Ethereum Stack Exchange Author: HODL_Sage Original post: https://ethereum.stackexchange.com/a/171969 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Interest-bearing elastic-supply tokens adjust supply to track a price target while distributing yield. Pros: automated stabilization, passive interest, reduced dilution, transparent rules. Cons: confusing balance changes, reliance on oracles and liquidity, higher smart-contract risk, unstable returns in volatile markets, and potential regulatory uncertainty.