## What is a Rebase Token? A rebase token is a type of token or cryptocurrency where the total supply adjusts based on a specific algorithm to reflect changes in underlying value or accrued rewards rather than the price of the token changing. These adjustments are called rebases. There are two main types of rebased tokens: 1. Rewards rebase tokens: These tokens are designed for earning rewards, like interest in lending or borrowing. 2. Stable value tokens: These tokens are designed to keep their value stable regardless of market fluctuations. Let's take a real-world example. Look at Aave's aToken. This is an example of a rebase token as you can see this _balance of_ function. With rebase tokens, the _balance of_ function will be dynamic. So you can see here is calculating the accumulated interest and returning this calculation. ```javascript function balance(address user) public view returns (uint256) { // dev: calculate the balance of the user, which is the principal + interest generated by the redirected balance // principal balance: interest generated by the principal balance // prepare: user for the interest which is being calculated // return the total balance of the user uint256 currentPrincipalBalance = super.balanceOf(user); uint256 balanceRedirectedByOthers = redirectedBalance[user]; // balance redirected by other users for user at rate accrual uint256 redirectedBalanceInterest = redirectedBalance[user] * userInterestRate; if (currentPrincipalBalance + redirectedBalanceInterest == 0) { // if the user is not redirecting the interest to anybody, across return 0; } else if (interestRedirectionAddress[user] == address(this)) { // if the user redirected the interest, then only the redirected // balance generates interest. It is due to the interest generated // by the balance redirected is added to that current principal balance. return getRedirectedInterestBalanceInternal(); } else { return currentPrincipalBalance + redirectedBalanceInterest; } } ``` When you deposit into Aave, you're essentially lending the amount to earn some interest. In return, you receive aTokens like aUSDC or aDAI, which represent your deposit. These tokens automatically adjust their supply to reflect the interest you earn and allow you to withdraw your deposit and accrued interest anytime. For example, let's say you deposit 1,000 USDC into Aave and the annual interest rate is 5%. Your aUSDC balance will grow to 1,050 over the course of a year.