Why is it important for the merger to turn ETH from inflation to deflation?

After the merger,ETH The net issuance of has changed from positive to negative. A reduction in the total supply of tokens will create deflationary pressures and have a continuing positive price impact.

Traditionally, tokens with a fixed maximum supply are called deflation tokens. All others are called inflation tokens.

ETH has no maximum supply, so according to this simple definition, it is inflationary. But after this week's merger, is it still inflation?

If ETH burns more tokens than it issues, it actually has deflationary pressure.

The following is the statistical data of ETH issued about every day (source:Ethereum[1] And Watch The Burn [2]).

Before the merger, in the past year since the London Hard Bifurcation (EIP-1559) on August 5, 2021, ETH burned 6700 tokens per day on average, less than 14600 tokens issued, so the net token supply has been increasing.

After the merger, there is no mining reward:

After the merger, 6700 was destroyed and more than 1600 were issued. The total net supply of ETH is decreasing. This is not like an "inflation token".

Therefore, the traditional definition of "inflation token" without maximum supply may actually have deflationary pressure.

Perhaps the definitions of inflation and deflation tokens need to be updated.

Redefining inflation and deflation tokens

The maximum supply of tokens is only one factor in determining whether tokens face inflationary or deflationary pressures.

The second equally important factor is the predictability of circular supply.

The inflation token is characterized by

1) There is no maximum supply of tokens, and 2) the increase in circulation supply.

The characteristics of deflation tokens are

1) A fixed maximum supply of tokens, and 2) a predictable and/or decreasing cyclical supply.

Token without these two standards is not absolute inflation or deflation. Some investigation is required, or it may not be suitable for any category.

Let's look at some examples.

Moneys perform better with maximum supply

Memetics are instructive in analyzing the largest token supply, as they have few fundamentals. Theoretically, those with the largest supply of tokens should be better off. Let's see if this will work.

Among the 90 meme tokens tracked by CoinGecko, 68% of the top 50 meme tokens have set the maximum token supply. However, only 36% of the next 40 tokens did so. This validates our theory.

Interestingly,dogeIt is the largest meme coin, but it has no maximum supply. When it was launched in 2013, its maximum supply was 100B tokens, but it was later cancelled. Having the largest supply of tokens would certainly help, especially in the early days.

Inflation Token

Terra Classic is the perfect interpretation of the token of excessive inflation. In the multi billion dollar collapse of UST and LUNA, the supply of LUNA tokens increased from 350 million to 6.5 trillion. As a result, the price could be expected to fall by more than 99.9%.

Interestingly, in order to revive it, LUNA is restarted on a different chain from Terra Classic (LUNC). On September 1, 2022, Terra announced that it would reduce Terra Classic's huge token supply by burning 1.2% tokens in every transaction on the blockchain - just like the 1.2% tax rate. In the following week, LUNC more than doubled.

Deflation Token

Binance is an example of a token that uses a deflationary strategy. So far, they have destroyed 39 million BNB tokens, accounting for 19.5% of its largest supply of 200 million tokens. The BNB community aims to continue [3] to achieve this through the real-time programmed destruction mechanism of each transaction until it is reduced to 100 million BNB tokens. In the words of their founder CZ:

BNB is deflationary. If you don't know what this means, then you lack basic financial knowledge to obtain wealth. This is the truth. It's time to learn.

Ripple (XRP) also conducts programmed destruction, but adds an additional deflation mechanism. They locked 55B of the total supply of 100B in a special escrow account to prove to the market that they would not release a large number of tokens randomly (like Terra). They release a relatively predictable [4] share every month, which increases stability and strengthens the deflationary characteristics of tokens, even if the circulation supply of tokens continues to increase. According to Messari [5], it is preliminarily estimated that:"At the current burning rate, XRP Ledger will take 20 years to burn the daily distribution of Ripple and its founder."

Ripple represents a good template for the project to manage its token supply.

Suggestions for Web3 project

If you are creating a Web3 project or DAO -- or evaluating a project for investment, here are my suggestions for creating a deflationary token:

  1. Set the maximum token supply programmatically

  2. Issue token economics to clearly explain how and when to allocate funds

  3. Let the community vote to agree on a release schedule for unlocking a specific pool

  4. Details of public release and any other content affecting your circulation token supply

  5. Set up a programmed destruction mechanism through online smart contracts rather than verbal commitments

  6. Reduce the supply of tokens to the target amount over a long period of time (e.g. 20 years)

To facilitate the founders, EthSign [6] is building a token management platform called Tokentable to enable Web3 projects and DAO to manage the distribution of tokens to investors and employees.

reference resources

[1]  https://ethereum.org/en/upgrades/merge/issuance/

[2]  https://watchtheburn.com/

[3]  https://www.bnbburn.info/

[4]  https://messari.io/asset/xrp/profile/supply-schedule

[5]  https://messari.io/asset/xrp/profile/supply-schedule

[6]  http://ethsign.xyz