DAOrayaki: Why is it important that the merger turns ETH from inflationary to deflationary?

Original Author: timlee.eth

Original title: The Merge flips ETH from being inflationary to deflationary. Here's why that matters.

TL，DR： 

After the merger, the net issuance of ETH turned from positive to negative. A reduction in the total supply of tokens creates deflationary pressure and has an ongoing positive price impact.

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

Ether (ETH) has no maximum supply, so by this simple definition it is inflationary. But after this week's consolidation, is it still inflation?

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

Below are statistics on the approximate ETH issued per day (source: Ethereum and Watch The Burn).

Before the merger, in the past year since the London hard fork (EIP-1559) on August 5, 2021, ETH has burned an average of 6,700 per day, less than the 14,600 issued, so the net token supply has been increasing.

After the merger, there will be no more mining rewards:

Combined, 6700 burns are greater than 1600 issues. The total net supply of ETH is decreasing. It's not like an "inflation token".

Thus, an "inflationary token" by the traditional definition without a maximum supply may actually have deflationary pressures.

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Redefine Inflation and Deflation Tokens

The maximum token supply is only one factor in determining whether a token faces inflationary or deflationary pressure.

A second, equally important factor is the predictability of circulating supply.

Inflation tokens are characterized by 1) no maximum token supply, and 2) increasing circulating supply.

Deflationary tokens are characterized by 1) a fixed maximum token supply, and 2) a predictable and/or continuously decreasing circulating supply.

Tokens that do not meet these two criteria are not absolutely inflationary or deflationary. Needs some investigation, or may not fit into either category.

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Memecoins perform better with a max supply

Memecoins are instructive in analyzing the largest token supply because they have little fundamentals. In theory, those with the largest token supply should do better. Let's see if this works.

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

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inflation token

Terra Classic is the perfect example of a hyperinflationary token. In the multi-billion dollar UST and LUNA crash, LUNA's token supply increased from 350 million to 6.5 trillion, resulting in a predictable price drop of over 99.9%.

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Deflationary Token

Binance is an example of a coin with a deflationary strategy. To date, they have burned 39 million BNB tokens, which is 19.5% of their maximum token supply of 200 million tokens. The BNB community aims to continue to do this through a real-time programmatic burn mechanism for 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 that means, then you lack the basic financial literacy to acquire wealth. This is the truth, and it's time to learn.

Ripple (XRP) also burns programmatically, but adds an additional deflationary mechanism. They locked up 55B of the 100B total supply in a special escrow account to prove to the market that they are not releasing tons of tokens indiscriminately (like Terra did). They release a relatively predictable share every month, which adds stability and reinforces the deflationary nature of the token, even as the circulating supply of the token continues to increase. According to an initial estimate by Messari: "At the current burn rate, it would take XRP Ledger 20 years to burn the daily distribution of Ripple and its founders."

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Proposals for Web3 projects

If you're creating a Web3 project or DAO - or evaluating one for investment, here's my advice for creating a deflationary token:

• Programmatically set the maximum token supply

• Publish Token Economics, clearly stating how and when funds will be allocated

• Let the community vote to agree on a release schedule for unlocking specific pools

• Public release details and anything else affecting your circulating token supply

• Set up a programmatic destruction mechanism through on-chain smart contracts rather than verbal commitments

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

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