Crypto 101: What Is Token Inflation?
For any market, inflation is also a dilemma and has a significant impact. So what about inflation in crypto? What is token inflation? How does token inflation affect GameFi? Let’s find out more deeply about CoinCu through the following article.
What is inflation?
In macroeconomics, inflation is the persistent increase in the general price level of goods and services over time and the loss of value in a currency. When the general price level rises, a unit of currency buys fewer goods and services than in the past, so inflation reflects a decrease in purchasing power per unit of currency.
We can simply understand, that 4-5 years ago $1 would buy a pudding. But now the price of the pudding is $2, with $1 can only buy half. Shows that the purchasing power of money has decreased.
Some other related concepts
- Deflation: is a decrease in the overall price level of the economy.
- Disinflation: is inflation at a very low rate.
- Hyperinflation (over 1000%): is the highest inflation, has a destructive impact on the economy and spirals out of control.
- Reinflation: Efforts to raise the general price level to combat deflationary pressure.
What is token inflation?
In short, token inflation is the issued token is depreciating continuously, with its circulating volume in the high market. A token that was originally priced at $10, is inflated to $0.1, for example. That means its value has been significantly reduced.
When does inflation in the cryptocurrency market take place?
Crypto is a currency that can be mined every day. So token inflation always happens. The inflation rate of each token is not the same, depending on how the algorithm of the blockchain system is built.
But unlike traditional economics, the number of coins for each project will have a fixed supply, with Bitcoin being 21 million BTC. That will help keep inflation in the crypto market under control. Inflation indicators of coins are also forecast and this is a very good reference for their price growth in the future.
Platform cryptocurrencies like Bitcoin, and Ethereum have a finite supply. Therefore, their inflation rate is always within the natural inflation threshold and is strictly controlled. Because of that, these coins are always trusted by world users, chosen as a place to store assets and long-term investments in the future.
Causes of token inflation in the crypto market
- Unlimited and continuous token issuance: As the number of tokens circulating in the market increases, it will also cause it to be inflated.
- The appearance of many projects: We can understand as growing 3, 4 more booths and assuming the number of shoppers and the amount used to buy are the same. Then the price drop will happen. This means that the market capitalization has not changed, but the supply has increased.
- Mining: Currently, coin mining is still quite popular. Helps to increase the number of tokens held annually for miners. But it reduces the coin’s value in the market.
- Staking: is a form of increasing the supply of tokens on the blockchain network. Though your token count will increase over time. However, the value of the token will also decrease accordingly.
If a project does not well control the amount and time of allocating tokens to circulation in the market, the value will be at high risk of inflation.
Token inflation in GameFi
Inflation in GameFi will happen when the number of tokens issued and earned in the project is too much, but the number of old players is less, the number of new players does not increase. It means that the game does not develop its users.
What causes inflation?
Mostly, the essence of any Play to Earn game is a Ponzi scheme. Take money from the latter to pay the former. Those who enter the game early, and earn a lot of NFTs and tokens will easily make profits than those who come in later, have low levels, and need to buy NFT items from the old people.
If the publisher does not limit the number of NFTs for sale, it can also be a cause of token inflation in GameFi. When its nature is that the former sell to the latter.
The next reason may be due to a large number of the project’s rewards, and the unreasonable distribution of Tokenomics. Making the number of tokens in circulation too large, the hands in the project discharge “on top” of gamers. Causing the project to go down seriously.
Or another reason why the GameFi project is inflationary is its very nature – P2E. Those who want to make money quickly, collect capital and get profits quickly will plow the game and then sell it for money immediately. This also causes the project’s token price to fall deeply day by day.
Effect of token inflation on GameFi
For the issuer, token inflation will cause a gradual decline in the project. The quality of the project is reduced, there is no development, and new people will not join when it is certain that it is impossible to recover capital when playing. The end result is the “destroyed” project.
For investors, those who are in the early stage without inflation can recover their capital. Investors who enter in the middle or later should not participate because it is easy to burn capital and cannot recover the initial investment. It’s just a waste of time, emotional damage, and money.
What measures to limit token inflation in GameFi
- Build logical, detailed, and rigorous tokenomics. For investors, gamers should carefully study how the project allocates tokens, and whether there are problems or not before participating in the game.
- Build a suitable play mechanism, and maximize deflation for players.
- Attract more new players continuously with attractive project content, methodical investment, and innovation in the development process such as Version 1,2,3, … to increase purchasing power as well as players have the confidence in the development and long-term survival of the project.
- Burn token: is the process of permanently removing a certain number of tokens from circulation, reducing the existing supply of tokens in the market, thus slowing down token inflation or in many cases causing deflation, etc. This method will be used by project developers.
Regardless of the quality project, there will be measures to limit the token inflation of its project. The reason for the occurrence of inflation can also appear due to many factors. What you should pay attention to the most is to research the project carefully before jumping into it. Hope this article has helped you understand more about the issue of inflation in crypto and have the right investment direction.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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