The concept of “reflections” was newly introduced to the cryptocurrency space in 2021.
A reflection mechanism can be defined as a process in which tokens act as a self-generating mechanism for their holders. As every transaction is taxed, YOU receive tokens automatically, simply by holding the token. The reflection mechanism was developed with the hopes of transforming the concept of yield generation in the DeFi ecosystem.
How It Works
These DeFi tokens use a stategic rewards system: every transaction made (buy/sell/transfer) with tokens that use this mechanism is ‘taxed’. This means that a percentage is added to a liquidity pool for every transaction, and another portion is set aside for redistribution among the current token holders.
As a result, the value of these tokens is self-generating and aims to promote a ‘hold and earn’ culture, which reduces selling pressure. The reflection mechanism is accomplished through smart contracts, which automate the token redistribution.
All holders need to do is HOLD their tokens, in the wallet in which they are stored!
Projects Adopting Reflection Mechanisms
Since the reflection mechanism concept was conceived in 2021, many new players have begun to enter DeFi, incorporating this mechanism into their offerings. Most of these projects have made significant progress in the last few months. Blue Sparrow has been a particularly significant project in this category. It was launched on the Ethereum blockchain platform on October 28, 2021, and has quickly risen to become the fast growing token in the ecosystem.
On their website, Blue Sparrow details the reflection mechanism as one of their core components, explaining their rapid adoption in cryptocurrency circles, showing the power of giving back profits to the people.
Investor Concerns, and Community Support for Blue Sparrow
The risks and rewards of Blue Sparrow reflective token model haven’t been lost on the larger investment community. In a recent NASDAQ article about the new cryptocurrency, the author concedes that one of its attractions is the individual tokens costing so little.
“You can get over a million Blue Sparrow with just a few dollars. It also has an interesting hook of charging a fee to anyone who sells and distributing half of that fee to Blue Sparrow holders. This is designed to benefit those who buy and hold.”
Coming under scrutiny is the way the selling fee mechanism works, with a 5% split between existing holders. Here’s the breakdown of the total 5 % Tax on each transaction:
• Rewards: 2% (redistributions to holders)
• Burn: 1% + (0.45% locked inside contract)
• Charity: 0.5%
• Marketing: 0.5%
• Development 0.05%
• Draws 0.5% (Daily – 0.35%, Weekly – 0.1%, Monthly – 0.05%)
The only issue identified by security platform, CertiK, is that an owner address acquires the pool tokens – giving them control over the tokens funded by the seller fee.
Merits of the Reflection Mechanism
While the reflection mechanism was designed to address issues such as selling pressure and excessive price movements, other key issues addressed by the reflection mechanism include:
● Security: fee generation and distribution are combined into one smart contract, and do not require approval from any external interface. This means assets are very secure!
● DeFi yield generation: the reflection mechanism automatically awards bonuses, allowing holders of reflection tokens to use their tokens for staking, and other yield generation purposes.
● Fair distribution of earned tokens: because the distribution process is automated, it is based on the number of tokens held by each user at the time, in a fair manner.
● Buyback and burn mechanism: to ensure the longevity of their tokens, some tokens use the reflection mechanism to automatically conduct buy-backs and burns. This causes a deflationary effect, reducing supply and increasing the value of the tokens left in circulation.
The Allocation Model of Reflection Tokens
Reflection tokens’ allocation models differ significantly from that of other tokens in the industry, due to the mechanism they employ. It works by automatically charging a tax, which is usually 5% after each transaction. This tax is then redistributed and shared among liquidity pools, marketing and development fees, and holders of reflective tokens. This is done to improve the allocation model’s transparency and to keep the respective communities informed. All wallets that receive a percentage of this tax are publicly available on the blockchain for effective tracking and accountability.
The Advantage of Reflection Tokens in a Bear Market
Based on the current cryptocurrency market outlook, there may be indications of a bear market in the works, which would significantly impact cryptocurrency prices. The majority of cryptocurrencies would experience a significant decline due to a high volume of sell orders from their holders. In this context, reflection token holders benefit, having a distinct advantage in a bear market. Through this self-generating income mechanism, there is another incentive to hold despite price fluctuations: much thanks to the ‘hold and earn’ mechanism and associated culture it promotes!
More on Reflection Mechanisms
The reflection mechanism is a relatively new concept in cryptocurrency circles, and it still requires a lot of fine-tuning before it can be widely adopted and implemented by other projects. However, in principle, it reduces panic selling to a bare minimum: potentially significant for the DeFi industry!