Reflection Coins: What Are They and How Do They Work?
Cryptocurrency has become a synonym for innovation and rapid growth. In this article, we will explore the latest innovation in crypto: reflection coins.
Cryptocurrency has become a synonym for innovation and rapid growth. One of the most innovative areas is the decentralized finance sphere (DeFi). It is not possible to generate profits from trading alone anymore, as alternatives have seen the light. Staking and mining have made their introduction throughout the years. However, those can be difficult to understand for investors who are new to the industry. Now, reflection tokens present investors with an opportunity to earn passive income by holding their tokens.
What are reflection tokens?
In a nutshell: Reflection tokens allow investors to generate returns on tokens that they hold. This can be done without the need to lock them up for a certain amount of time, as is the case with staking in many cases.
One way to view reflection tokens is as reward tokens. Through a static reward system, token holders get a portion of the transaction fees. Based on a "reflection" mechanism, tokens are distributed to all investors in a liquidity pull through the use of smart contracts. As complicated as this may seem, it is actually simpler than yield farming, mining, or staking. Therefore, reflection tokens make it easier than ever for investors of all skill levels to generate passive income from their holdings.
How do reflection tokens work?
Reflection tokens pay their holders without them having to move any money, sign and lock up their tokens in a staking pool, or even check up on their holdings. A so-called "reflection" is financed by a percentage tax on any transaction in the native token. The tax that is withheld from a transaction gets distributed according to the amount of tokens an investor holds. One of the greatest benefits of reflection tokens is that they improve market stability. Investors do not need to buy, sell, move, stake, or lock up their tokens, and therefore are less likely to move their money around, which can cause volatility in the market. Instead, it actually improves liquidity as it facilitates transactions, and as holders simply get rewarded for holding the coin, the incentive to buy, sell, or move their money is low. This is further discouraged by the tax system, as transacting the coin is taxed.
What are the risks?
As mentioned before, the initial purchase of a reflection token is taxed, and thus fees need to be paid for the purchase. If the project is adopted, this can be taken into consideration. Yet, it can take several months before investors start to make money.
Like any other digital token, scammers might abuse the expanding reflection token trend, as we have seen in the past (see this article for more information).
Consistent returns are not guaranteed, as in fact this can fluctuate. This is because the yields depend on the daily volume an asset produces. If there is little to no activity on the network, the yield might be close to none.
What are popular reflection tokens?
Safemoon (SAFEMOON): One of the first reflection tokens in the industry, the project has been very successful. Safemoon's smart contract charges 10% on top of any SAFEMOON transaction, with 5% distributed to investors and 5% going to SAFEMOON`s liquidity pool.
Reflect Finance (RFI): Operating on the Ethereum network, it applies a 1% fee to RFI transactions, which is automatically distributed among coinholders. The amount depends on the holding size of the investor. Additionally, RFI holders can also use their tokens for yield farming and staking without affecting RFI reflections.
Evergrow Coin (EGC): This newcomer gained quick attention, and for good reason. All ECG transactions are taxed at 14%, which is instantly reflected at 8% for token holders. Unlike other reflection tokens, rewards are paid in BUSD. An interesting fact is that within the first few months of its launch, over 35 million tokens were paid out by ECG.
How do I earn passive income with reflection tokens?
First and foremost, thorough research must be done on the reflection tokens, as most of them differ greatly in numerous areas. Once you have made your choice and decided which token you wish to hold, you will need to fund your purchase. These tokens are usually bought with stablecoins or major cryptocurrencies. Examples are BTC, ETH, or USDT. If you do not own such cryptocurrencies you can sign up for a Bitget account to get started.
You then need to swap your freshly bought cryptocurrencies for the tokens you are interested in. This can be done through a swapping platform. Various swapping platforms offer various pairs, so make sure you research the swapping platforms beforehand to avoid surprises.
Once you buy your tokens, you will be responsible for paying the tax. From that moment on you own the tokens and can store them in your wallet, and you can start earning rewards. To qualify for rewards, no further action is required.
Is it worth investing in?
Reflection tokens are new to the cryptocurrency industry. Currently, reflection tokens might be associated with altcoins and meme coins. However, their purpose is to maintain and increase the liquidity pool of a network. With that in mind, they serve a much bigger purpose for the cryptocurrency ecosystem altogether. As crypto adoption grows, reflection coins will have room to grow in the years to come as investors continue to look for more sources of passive income as the market matures.
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Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.
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