It seems like every six months the topic of “inflation rate,” or token issuance rate, of currencies pops up, and still no one seems to care. 2021 and 2022 were years where the inflation rate was incredibly important, both in the real market and in the world of digital assets. In the larger macroeconomic context, inflation rates have driven the behavior of world banks for over a year. An uncontrolled climbing inflation rate has caused central banks like the US Federal Reserve to tighten access to capital and aim for controlled recessions to reign in inflation.
Ethereum was able to pull off The Merge, driving its inflation rate way down and sometimes flipping it negative when there is sufficient network transaction volume. Ethereum issuance rates have floated in the low single digits since The Merge; right now it’s at 0.03%. Without The Merge, ETH issuance would be at nearly 4%.
Bitcoin cuts its issuance rate in half every 210,000 blocks mined, known in crypto as the halving. Some have tied Bitcoin’s halving to massive run ups in crypto prices, though honestly I have some skepticism, and serious concerns, about this whole mechanism.
But there is a dark side to token inflation, one that fueled the entirety of the DeFi boom–it can make your assets worthless. Many DeFi projects were offering tens of thousands of percent yield for staking their token, something they could only do because they were doubling the token supply every few days or weeks. While this isn’t as clean and simple in the open market, and it doesn’t happen immediately, when the amount of token doubles the price per token cuts in half.
These massive inflation rates have been a problem for some L1’s as well, and have personally swayed me away from long term investments in chains I otherwise liked. For instance, Solana issuance last year was floating around 26%. The required growth rate to make holding SOL a good bet is insane.
The buzz going around now about issuance rate is related to Bitcoin. The next halving isn’t until 2024, but when that happens the issuance rate of Bitcoin will be less than the rate of additional gold entering the market. It’s a pretty noteworthy threshold, as Bitcoin has long been compared to gold. My concern around Bitcoin issuance comes from the miner side. Miners are already getting absolutely crushed keeping their operations running due to the declining Bitcoin price–if the rate of BTC they get per successfully mined block halves, they’re all going bankrupt.
This has been a concern for Bitcoin since the beginning. The Bitcoin maximalists will tell you that it’s okay because individuals will take the loss of mining Bitcoin at home because they want to support the network. That seems like a bad plan if your goal is to get Bitcoin to be a reserve currency for nations.