Are Reflection Tokens just a Gimmick? - What are reflection tokens and do they stack up?

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A new term has entered the crypto enthusiasts repertoire of technical lingo. That term is reflection tokens or reflection for short. It’s a term that has only been around for the last four months but the concept it describes emerged from a project called Hoge Finance which was launched a month before Safemoon, the memecoin which popularized the concept of reflections.

What is a reflection?

It is the payment of a reward to holders of tokens in the native token.

Let’s take Safemoon, the popular memecoin, as an example. Safemoon tax both the buyer and seller 10% on each and every trade. 5% of this tax is redistributed back to token holders. This redistribution is called a reflection or a reflection token.

Many projects have followed the same example set by the pioneer Hoge Finance.

This is the typical marketing blurb that tries to explain the concept:

The Original Buyback Hyper-Deflationary Token

EverRise token ($RISE or RISE) is a collateralized cryptocurrency that grants investors holding RISE instant rewards on all transactions, and protects them with its unique buyback and burn protocol.

Hyper Deflationary is a popular term used by projects marketing their tokens, it is also a red flag.

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Growing movement

There is a large and growing movement following cryptocurrencies which offer what can be termed as a passive income. By holding tokens in Safemoon for example you will receive a regular flow of additional tokens. The question is, are these reflection tokens worth investing in for the income?

The answer as is often the case with our articles is yes and no.

We will continue to use Safemoon as an example.

Let’s say you buy $100 in Safemoon tokens today. That will entitle you to a very very small share of the daily volume which is around $5 million. Of that $5 million 5% gets distributed back to token holders. If you annualize this return that comes to an APR of roughly 10%. Not bad you may think!

However there is a catch. Your $100 initial investment is in fact $90 after the 10% tax. In addition when you sell you will also be subject to the same tax. That means to break even you must hold your tokens for at least 2 years. Now you can see the attractiveness of this tax to the project, it encourages token holders to hold for the long term, only in year three do your reflection tokens start to exceed the taxes incurred on purchase and sale.

Reflection tokens are an effective way of garnering loyalty in a project but it won’t stop the mercenary traders who treat the tax as a cost of doing business. They are the ones who generally contribute to the wild price swings.

What factors determine the APR?

A few factors determine the attractiveness of a reflection token. The distribution percentage, the token’s daily volume and it’s token price growth.

The higher the volume the more tokens being distributed back to holders. That also dovetails with the price of the token. Let’s say there is a sell off, then the volume will increase, the price will fall and token holders will receive more reflection tokens with a corresponding higher APR. If the price increases on the other hand and volume remains stable holders receive less tokens with a lower APR.

It is worth mentioning that newly listed projects will start with low volumes. As volume builds, so do reflections. That will benefit early investors.

As an investor looking to invest in reflection tokens it is essential you work out the APR before making your investment as returns vary wildly between projects as you will see shortly.

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Are reflection tokens worth it?

The concept of reflection tokens is a sound one. However they shouldn’t be looked at in isolation. The vast majority of tokens that offer a ‘token back’ arrangement are low quality memecoins. These are generally to be avoided unless you are a memecoin fiend who has found an effective formula for profitably trading these pointless tokens.

In fact the mention of a passive income is usually a deal breaker for us unless it is quickly followed by a sound business model. That rules out the majority of crypto projects straight away!

So let’s look at a few projects with reflections and check out if any are worth a closer look.

Safemoon

Memecoin which has built a range of products to appeal to its 2.6 million holders many of which were air dropped their tokens.

Distribution to token holders: 5%

APR: 10.3%

Assessment: Avoid

BabyFloki

Who buys this shit! A memecoin whose sole selling point is paying out reflections in Dogecoin. If you took the time to work out the APR on these reflections you would already have your 10 foot barge pole in hand.

Distribution to token holders: 2%

APR: 0.8%

Assessment: Avoid

Flypaper - FlyPaper price, STICKY chart, market cap, and info | CoinGecko

FlyPaper's goal is to end DeFi scams and bring increased legitimacy into the Binance Smart Chain. The SwapMeet and FlySwapper are the two banner projects of the FlyPaper ecosystem.

If a project wishes to be listed on the SwapMeet and FlySwapper, they must first be reviewed extensively by the FlyPaper team, who then prepares an extensive report. The report is then published for the community of STICKY holders. Using the findings in the report, the community of holders uses STICKY to vote on whether or not they think the project should receive Larry's Stamp of Approval. If approved, the project receives certification for 6 months. Upon expiration, the project must be reviewed and recertified to ensure compliance.

Distribution to token holders: 4%

APR: 208%

Assessment: Buy

MinersDefi - MinersDefi price, MINERS chart, market cap, and info | CoinGecko

MinersDefi is an algorithmic decentralized collective for hydropower-fueled Bitcoin mining. Each transaction has a tax which is put into a dedicated Bitcoin Wallet which is then used to purchase BTC Mining equipment to mine BTC.

Distribution to token holders: 4%

APR: 11.3%

Assessment: Buy

Infinity Token

Infinity is set to facilitate the costly process of cryptocurrency mining by developing a Bitcoin and Ethereum mining farm.

Distribution to token holders: 4%

APR: 9.7%

Assessment: Avoid

EverRise

Distribution to token holders: 2%

APR: 14%

Assessment: Avoid

Conclusion

Reflection tokens aren't all they’re cracked up to be. While the concept is a sound one in the main they have been paired with memecoins. Whilst not all memecoins are a waste of space the majority are. They have no use case and their only possible value is in building a significant community and then developing products for that community. That promise however is a long shot. When buying into reflection tokens it is important to one, calculate the APR and two, feel comfortable about the project behind the token. If there is no viable use case then it is best to avoid and keep on looking. There are plenty more fish in the sea!