Inflation in Blockchain & DeFi
Inflation is how a decentralized economy incentivizes it’s users, community, and participants. Everything from staking in Blockchain’s, to rewarding liquidity in Decentralized Finance (DeFi) is created through inflation.
DAFI creates a new model of incentivizing through the value of the protocol, but first, let’s define inflation.
What actually is inflation?
Inflation, from a monetary perspective, is where the circulating supply increases. This is often paired with increasing prices and a reduced purchasing power.
What is inflation in Blockchain?
Almost every Blockchain or DeFi platform, releases a native token into circulation. This use of inflation enables the following -
- Incentivizing Blockchain’s (e.g. consensus, block-rewards, staking). Network participants receive newly released tokens (e.g. BTC).
- DeFi — Most DeFi features use some form of a token, which is issued as a liquidity reward to those supporting it’s decentralization.
- Participation — Many DApps and DeFi platforms further incentivize user’s to participate by allocating rewards to the community.
The major flaw that kills DeFi
Inflation works, actually it is needed, especially in decentralized economies. This can be seen in the robust security of Bitcoin’s network. However, the Blockchain’s and DeFi of today, often create hyperinflation.
This model, means that two scenarios will occur -
- A new protocol or platform will set a high reward-rate to attract early users and liquidity. This early period of low-demand, coupled with a high inflation rate, creates a hyperinflationary model — where most tokens die.
- A period of a bearish market, or decline in demand. As the inflation rate remains the same, and does not adapt to the change in the economy, hyperinflation creates volatility & harm in growth. This can be seen in the 2018 crash where most tokens simply did not recover. More recently you can see a brief period of this occurring in October 2020, where several hyperinflationary DeFi tokens had fallen sharply by 60%.
Unifying Chains & DeFi
DAFI recreates inflation, by releasing DFY units for staking. 1 DFY is pegged to the demand of DAFI, and is burned in return for DAFI as an end-reward.
It can therefore incentivize during periods of low-demand, without a hyperinflationary design. This has applications across Blockchain’s, Staking and DeFi platforms.
- Any new/existing token or platform synthesizes xDFY
- xDFY is pegged to their native token, and it is issued for staking, liquidity, or participation rewards — it becomes an intermediary, elastic unit
- As demand of the economy changes, xDFY rebases to increase/decrease it’s quantity respectively — meaning it can never create excessive supply
What is inflation in Blockchain?
Bitcoin uses inflation, to incentivize mining, this creates the foundation for a decentralized, secure nature. The network releases new BTC into circulation through block-rewards.
However, Bitcoin is scarce, it has a maximum quantity of 21 million, this finite amount does create anti-inflationary properties. Bitcoin also reduces it’s inflation rate every 4 years (halving event).
The inflation of the network, makes Bitcoin function. However, less adopted decentralized networks, DApps, and DeFi cannot follow this same trajectory. In most cases, the early, high inflation rate destroys the economy and harms it’s growth in the long-run
In 2011 Bitcoin had an inflation rate of 50%. Now, at the time of writing, it has a reduced rate at 2.5%.
Why does this not work anymore?
For newer Blockchain’s and DeFi of today, it’s simple -
Low-demand + High-reward rates = Hyperinflation
For a Blockchain protocol, or DeFi platform, it usually needs inflation. But, the periods of lower demand, coupled with a high inflation rate, often kills the economy before it’s even matured. There is zero adaptive-nature.
By adding an elastic, intermediary in the equation, decentralized economies can switch to a demand-pegged inflation model. Making excess supply, and hyperinflation impossible. This is DAFI — changing chains & DeFi forever.
From everyone here at DAFI, we wish you a warm, happy holiday.
