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‘Deflation’ is a dumb way to approach tokenomics… and other sacred cows – Cointelegraph Magazine

‘Deflation’ is a dumb way to approach tokenomics… and other sacred cows – Cointelegraph Magazine

Having taught and studied token economics at the University of Nicosia, I’ve found that students often have some decidedly muddled beliefs about how what tokens are and how business and token economies work.

Unlike microeconomics and macroeconomics — which are based on decades of research, debate and inquiry that have produced some commonly accepted principles — tokenomics is a much newer field of study full of people without economics experience.

There are many self-professed “experts” who provide advice that sounds fine and is often even sensible in theory but that fails in practice.

When designing a token economy, what you really want to focus on is:

  • Is the economic strategy repeatable?
  • Is there some way of diagnosing when and how to deploy the strategy for your token and the estimated value of doing so?
  • Is there research that validates the strategy so you can talk about it more credibly?

Deflationary tokens

Take, for instance, the idea held dear by many that deflationary tokens have an absolute advantage. “Deflationary” means an ever decreasing supply of tokens, which in theory increases the purchasing power and value of each remaining token. “Inflationary” means the opposite: an ever increasing supply which, in theory, reduces the value of each token.

You’ll hear commentary along the lines of “how deflationary tokens empower a crypto project’s value” from blockchain pundits such as Tanvir Zafar celebrating the limited supply of Bitcoin and the deflationary supply of Ether following the Merge.

It’s an idea even propagated by a widely recognized community for tokenomics best practices, the Tokenomics DAO, which has a “Tokenomics 101” page that states

“People who understand Bitcoin will see great value in the fact that it is so simple, elegant and has a limited total supply. Bitcoin’s tokenomics have created digital scarcity that is enforced (through token incentives) by the network.”

But while many token designs emphasize deflation, “they are not optimally designed,” according to Will Cong, the Rudd family professor of management and faculty director of the FinTech at Cornell initiative at Cornell University.

Taking their cues instead from tweets and community ideologies, “many platforms also can’t even write down a logical objective for their token supply and allocation policy,” Cong continues.

Focusing on whether a token is inflationary or…

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