What Are Reflection Tokens in Crypto & How Do They Work?

The cryptocurrency world continues to evolve at a rapid pace. One of the most exciting areas of growth is in the decentralized finance (DeFi) sphere. Throughout the history of cryptocurrencies, investors have been attracted by the possibility of generating profits from their trades. In addition to trading, profits have come from staking, mining and rewards. However, the complexities of some of these options have been prohibitive for small and new investors. Now, reflection tokens present investors with an opportunity to earn passive income by holding their tokens.

What Are Reflection Tokens?

Reflection tokens are also known as reward tokens, because they pay token holders a portion of collected fees simply for holding them through a static reward system. Their functionality provides investors with a source of passive income.

A portion of the transaction fees assessed on cryptocurrency transactions can be passed on to investors holding reflection tokens. The process is completed through a reflection mechanism that uses smart contracts to distribute the tokens to all investors in the liquidity pool. While this may seem like a complicated process, it’s simpler than either mining, staking or yield farming. Thus, crypto reflection tokens make it easier for investors of all skill levels to generate passive income from their holdings.

How Do Reflection Tokens Work?

Cryptocurrency markets are well-known for their volatility, which is often the result of traders trying to achieve gains through buying low and selling high. For example, when whales, or major cryptocurrency investors, buy and sell a large number of crypto coins at one time, values can rise or dip dramatically in a short period of time. 

Reflection tokens provide investors with another way to earn income, encouraging investors to hold rather than trade their tokens. This promotes market stability and allows investors to profit, even if they don’t have the time available to constantly monitor the market.

The reflection mechanism gives token holders a percentage of the transaction tax imposed when a native token is traded. Distribution is equitable to all liquidity pool providers, based on their share of the pool. Smart contracts ensure that the reflection process is fully transparent and executed instantly.

Reflection tokens also benefit each program responsible for its native coin. This benefit stems from raising and maintaining funds that can be used to further develop the program, which can use a portion of its transaction tax to fund growth and stability.

Benefits of Reflection Tokens

Crypto reflection tokens offer benefits to the platforms responsible for their native tokens, as well as to their investors. Specifically, they benefit both new and experienced investors, regardless of the size of their investments. Let’s look at the specific benefits offered by reflection tokens.

Market Value Stabilization

As noted above, by offering a financial benefit to investors holding their tokens, reflection tokens serve an important value stabilization function.

Hassle-Free Income Generation

To profit from cryptocurrency trading, investors must keep a constant eye on the market and be ready to execute trades at the most opportune time. Reflection tokens, however, create a passive income stream for tokens held in the investor’s wallet. There’s no need to constantly check the market in order to earn income from reflection tokens.

No Steep Learning Curve

Investors may also earn rewards for holding tokens through staking. While staking may initially seem like an easy process, the reality is that it can be somewhat complicated on various platforms. More than that, some platforms require a long-term hold that makes staking relatively unattractive. Buying crypto reflection tokens requires minimal effort. Once the tokens are in the investor’s wallet, they’ll continue generating income until they’re sold.

Immediate Rewards Distribution

Each platform has its own staking process, although many distribute staking rewards only on a relatively extended schedule. Some platforms require the pool to remain a specific size in order for investors to receive rewards. On the other hand, reflection token rewards are generated and distributed in real time, thanks to a reflection mechanism rooted in smart contracts.

Presumptive Value Appreciation

It’s impossible to accurately predict the future value of any cryptocurrency. However, since reflection tokens encourage investors to hold their tokens with the benefit of a stable passive income, investors are naturally inclined to purchase more tokens to grow their passive income. When this happens, the token’s value may appreciate due to the increase in demand as buyers hold their tokens. While other factors may also drive cryptocurrency values, reflection token holdings do place upward pressure on value.

Risks of Reflection Tokens

While reflection tokens offer considerable benefits for both investors and the tokens’ platforms, there are some pitfalls and downsides which can impact the profitability and other aspects of your investment. What should you know about reflection tokens before making an investment?

Transaction Tax

Transaction taxes are generally assessed both when tokens are bought and sold. This means that you may pay a transaction tax on your initial purchase of reflection tokens. As a result, all investors will initially begin in the hole and remain in the red on their investment until that tax has been recouped. It’s reasonable to anticipate this will take at least a few months. Therefore, investing in reflection tokens should only be considered for long-term gains.

Exposure to Fraud

Currently, reflection tokens are available on decentralized exchanges (DEXs). Because of this, investors may be at a greater risk of loss related to fraud. One example of fraud to watch for is known as a rug pull. Because of this potential risk, some investors may be inclined to initially limit the size of their investments.

Return Based on Trading Volume

Reflection tokens generate money for token holders when the native token is bought and sold. When the cryptocurrency is being heavily traded, reflection token holders may see strong gains. However, when trading volume is slow, the return for coin holders can dry up substantially.

A New Investment Option

Reflection tokens are still relatively new in the cryptocurrency world, so all of the potential risks and pitfalls may not yet be clear to investors. In addition, there are a limited number of reflection coins to choose from at the moment.

Reflection Tokens vs. Hyper-Deflationary Tokens

Some cryptocurrency investors may identify some similarities between reflection tokens and hyper-deflationary tokens. In reality, these are both types of deflationary tokens, but they function in different ways and have different impacts. 

Similarities

Both reflection tokens and hyper-deflationary tokens have a deflationary function. This means that they decrease the number of tokens in circulation over time. In doing so, both of these tokens can cause value appreciation.

In addition to this functionality, these types of tokens share another benefit: They both encourage investors to hold their tokens for financial gains. But while each offers the opportunity for profits, they accomplish it in different ways.

Differences

Reflection tokens pay token holders rewards from transaction taxes. Taxes are generated regularly from both purchases and sales. As a result, reflection tokens provide a passive income stream for investors for as long as the tokens are held. Hyper-deflationary tokens, however, offer financial gains only through the sale of tokens.

To understand the difference in this key area, it’s necessary to learn what makes these tokens deflationary. Reflection tokens reduce their numbers in circulation by encouraging long-term holds. These tokens aren’t burned, however, and can re-enter active circulation. Hyper-deflationary tokens, however, burn a percentage of tokens for each transaction, causing a decrease in circulation. As the number of tokens in circulation decreases, the value increases.

How to Earn Passive Income With Reflection Tokens

By taking a few steps today, you could establish a passive income stream through crypto reflection tokens. The first step is to choose your reflection token. While there’s a growing variety of tokens to choose from, they differ greatly in key areas. As you explore your possibilities, take a moment to review each project’s mission, team experience and history. You can also read consumer reviews and research transaction fees.

Once you’ve decided which reflection token you want to hold, you’ll need to fund your purchase. These tokens are usually purchased with stablecoins or major cryptocurrencies, such as BTC and ETH. If you don’t hold such cryptocurrencies, you’ll first need to purchase them through an exchange like Bybit. You can sign up for a Bybit account to get started. In addition, if you don’t yet have a crypto wallet, you’ll need to create one to hold your reflection tokens. 

To invest in reflection tokens, swap your cryptocurrency(ies) for the reflection tokens you’re interested in. This can easily be done through a swapping platform. Be aware that swap platforms only offer specific token pairings. You’ll need to research swap platforms to find one that offers the reflection tokens that you wish to buy. 

When you buy your reflection tokens, you’ll be responsible for paying the transaction tax. However, once your reflection tokens are in your wallet, you can start earning rewards. Other than holding your tokens, you won’t need to take any additional steps to qualify for rewards.

Popular Reflection Tokens

The profitability of your investment of reflection tokens is strongly rooted in the tokens that you invest in. Everything from the up-front transaction tax that you pay to the distribution structure, trading volume and more will play a role in your return. With this in mind, what are some of the leading reflection tokens to consider?

EverGrow Coin

EverGrow Coin, or EGC, is one of the newer options available, but it’s already attracted ample attention from investors, thanks to its generous reflection system. Specifically, all EGC transactions are assessed a 14% tax. The instant distribution amount to reflection token holders is 8%. Unlike other reflection token platforms that pay rewards in their native token, EverGrow Coin pays its rewards in BUSD. Notably, over $35 million in token reflection rewards were paid out by EverGrow Coin within just a few months of its launch.

Reflect Finance

Another reflection token to consider is Reflect Finance, or RFI. This is established on the Ethereum network. All RFI transactions are subject to a 1% fee, which is directly distributed to token holders. The allocation is based on each investor’s position. Notably, RFI token holders can continue to earn passive income through reflections while also generating income from staking or yield farming.

Lucky Block

Lucky Block has a unique concept that offers users the chance to earn daily rewards simply by holding particular NFTs and participating in competitions. It’s based on giving all token holders a chance to win a lottery. As soon as an NFT is purchased, it grants users entry into a competition held on the platform, as well as a portion of the rewards pool, which is made up of 1% of the total profit earned from every competition held on the platform.

Bonfire

The primary goal of Bonfire is to create a decentralized virtual world. Bonfire was established in April 2021 and has a total supply of one quadrillion tokens. All Bonfire transactions are assessed a 10% fee. This fee is evenly allocated for rewards and redistribution.

Are Reflection Tokens Worth Investing In?

Crypto reflection tokens can be a solid investment, but they do come with risk. For example, the overall value of the tokens may decline, due to market volatility, which can impact the investor’s balance and even lead to a loss in total value. Token holders must pay a transaction fee up-front when they purchase their tokens. Depending on factors like trading volume and return rate, it may take several months or longer for the token holder to break even with their investment, and to start earning money. 

With this in mind, reflection tokens are a good investment for those who plan to hold their tokens for a long period of time. Passive income can be generated as long as your tokens are held. In addition, depending on price fluctuations, investors may need to time the end sale of their tokens, based on market value.

The Future of Reflection Tokens

Reflection tokens are relatively new to the cryptocurrency world. Currently, reflection tokens are associated with altcoins and meme coins, and they’re used as a means of maintaining and increasing a program’s liquidity pool. With this in mind, they serve an important purpose to these programs, and can promote a platform’s growth and development. Because reflection tokens benefit both investors and programs, they could increase in both popularity and prevalence going forward, so we may see more reflection programs introduced in the years to come.

Closing Thoughts

While reflection tokens are a new way for investors to earn passive income, they’re already popular with smaller investors, as well as whales. As more investors discover the benefits that they offer, and as more reflection programs come online, it’s probable that reflection tokens will become a more mainstream passive income generation method for investors.