2.2.3. Inflation/Deflation

Projects often start with inflationary token mechanics. Specifically projects with a vision of constructing their own mainnet, might intentionally avoid static, reserve-based tokenomics since it greatly limits capabilities of maintaining crypto-economic security. In addition, some dApps with revenue streams may utilize inflationary incentive system as part of their unique tokenomics strategy. And lastly, some dApps striving for additional runway or subsidiaries to support their excessive operational expenses, may mint more tokens to support their business.

Tokens Newly Issued into the blockchain: Total Issued

Most blockchain network, including Bitcoin and Ethereum are able to track down newly minted coins/tokens, $Q_{change}$ by querying validator nodes or sometimes even with a planned schedules on its inflationary tokenomics in a trustless manner. Amount of new tokens introduced to the network, $Q_{change}$ is then added to $TotalIssued$, $TI$ that are numerically verfiable with on-chain data analysis.

$$TI(t+1) = TI(t) + Q_{issued}(t)$$

Tokens Permanently Destroyed from the Network: Total Burnt

On the other hand, tokens get permanently burnt and destroyed from the network in certain circumstances. For instance, EIP-1559 on Ethereum Network introduced gas fee and its incineration from the network. This is represented as follows:

$$TB(t+1) = TB(t) +Q_{burnt}(t)$$

One should always be noted that each unique blockchain requires its own tracking methodology. Here at Xangle, we illustrate supply tracking methodology of newly minted tokens and tokens burnt of dApps and mainnets. Token standards such as ERC20Mintable Standards are easily supported and is implementable at a project level on Xangle ERP’s Tokenomics Engineering Module. However native token supply of many mainnet projects starting from Bitcoin, Ethereum, Aptos, Klaytn, Wemix are tricky and requires in-depth tokenomics analysis, which are well covered in Xangle LiveWatch.

Relationship between TotalSupply

Therefore this can be organized by

$$TotalSupply(t+1) = [TI(t)+Q_{issued}(t)] - [TB(t) + Q_{burnt}(t)]$$

What Makes A Project's Total Supply Change?

Usually a project’s token inflation status are given as follows:

• Reserve

  • Most dApp Projects like Blur, Link, Iskra, have limited amount of tokens minted

• Reserve + Inflation

  • project that initially started as fixed supply of tokens but who has not

• Inflation only

  • project that relies on inflationary tokenomics only despite their previous dependency on its token reserve.

• Totally Dynamic (can be either inflationary and deflationary)

These inflationary status are interchangeable, meaning a project could always decide via governance to change their tokenomics state from one to another. For example, a project rolled out in 2015 with static reserve strategy on their whitepaper might switch to additional inflationary tokenomics in order to appropriate their current R&D progress.

A great example of a project with such history is aforementioned Ethereum, which started with fixed supply in 2010 by Vitalik Buterin with pre-minted tokenomics, then switching to Proof-of-work in 2013, and then finally settling with deflationary(possiblity to deflate, $ETH can always inflate and deflate with respect to its usage status) tokenomics with the EIP-1559 and proof-of-stake consensus mechanism implemented via Shanghai Hard Fork in 2022.

Inflationary supply in Circulation and Non-Circulation

While most inflationary tokens go straight towards circulating supply, this is not necessarily true. There are cases where Inflationary token supply are sent to non-circulating addresses, meaning project in charge of its ownership needs to disclose such inflationary, but non-circulating tokennomics with clarity in order to notify its investors and reduce information asymmetry.