Inflation in the Cryptocurrency Space and the Ethereum Solution

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Inflation is an interesting concept, with many likening it to a “magic pie.” Though a fairy sells a magic pie to you like something special and unique, it is easy to ignore that the fairy can make more pies whenever. The one unique slice of pie you bought could be 1 of 10 today and 1 of 100 the next.

In America today, inflation has become a persistent issue of late. This is simply the adverse effect of the increased printing of money during the break of the COVID-19 pandemic to fund stimulus measures to cushion the impact of the pandemic.

Using the magic pie concept, inflation in economic terms means that every dollar is worth a little less because of the creation of new bills. In a similar sense, inflation affects the crypto industry.

In the crypto world, minting new coins is the equivalent of printing more dollar bills.

Regardless of whether the price of the underlying coin goes up and investors are smiling at the bank, as long as more coins are getting minted, there is a pernicious inflationary action going on in the background.

The EIP-1559 Ethereum Upgrade

Before its latest major upgrade in August 2021, approximately 6 million Ethereum tokens got added to the circulating pool the year before.

The EIP-1559 upgrade introduced numerous improvements to the Ethereum network. However, one improvement, in particular, put ETH on track to overcome inflation; its deflationary attribute.

Simply put, this upgrade allows Ethereum to carry out regular token “burns,” which essentially removes some ETH out of circulation, permanently.

That said, your ETH investment is worth more because the pie (circulating supply) is constantly shrinking.

Smart investors know to look out for more than just the price of a token when investing; they pay attention to the value of the coin, which is partly determined by inflation.

Demand and Supply and Tokenomics

To understand inflation better, monitoring the supply and demand of an asset is a good place to start. Basic economics dictate that when supply increases, demand increases, and vice versa.

A prevalent belief about Bitcoin (BTC) is that its capped supply, pegged at 21 million coins to ever get minted, is the reason behind its impressive demand.

However, developers still have the freedom to create new tokens if the circumstances deem them fit. All it takes is a few lines of code and it is done.

That said, experienced investors look at the total supply of a prospective token and the supply that could be created in the future. They also look at the tendency of the token developers to mint new tokens out of thin air in the future, like most projects do.

That said, the token with the best “tokenomics” is Ethereum: a significantly profitable project with insane growth prospects along with decreasing supply. So far, Ethereum’s “magic pie” has been in reverse making it one of, if not the most, promising crypto projects.

 

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Azeez Mustapha

Azeez Mustapha is a trading professional, currency analyst, signals strategist, and funds manager with over ten years of experience within the financial field. As a blogger and finance author, he helps investors understand complex financial concepts, improve their investing skills, and learn how to manage their money.