On Polkadot Inflation and Crypto Economics
Cryptocurrency economics isn’t easy and it isn’t straightforward; if it was easy, then everyone would use the exact same system because the ideal structure for any crypto economy would be obvious.
Nevertheless, reality itself does not stop cryptocurrency forum members from sitting down with their computer, maybe their cellphone, looking at a complex economic dilemma, and then proposing an overly-simplistic one-sentence solution based on an elementary understanding of economic principles.
I consider this to be part of the commonly observed internet phenomenon that I like to call: “Memenomics.” Memenomics is when you concede serious economic considerations in order to pursue a doctrine that focuses on “hype” and “the vibe.” Memenomics is when you arbitrarily pick and choose which economic principles are valid solely based on a Youtuber or forum poster that you listened to once.
Now, it’s important to note that memenomics is often not the economic concept being championed itself, but rather, the flawed logic that leads to the favoritism for said economic concept. After all, it’s totally possible for two conflicting economic philosophies to both make logical points. However, memenomics does not care about merit — it cares about what’s going to best soak into the mind of the desperate crypto HODLer. That’s why it’s all a matter of memery.
Anyway, long story short, I am making this post to combat the memenomic trends that I have seen begin to plague the Polkadot community.
You can actually just skip this upcoming section if you want to jump into the meat of the article. This is just me giving some background, motivations, and general thoughts about the crypto space. I wanted to provide a slight transition from my previous medium content after having been MIA for two years.
Honestly, I didn’t want to have to make this post because I’ve felt lazy and disheartened. Back in 2022, I boldly predicted that innovations in the crypto space, particularly when it comes to scaling solutions, would finally allow us to evolve past the phase of mindless speculation and into a reality where meaningful applications would dominate the space, and technical fundamentals would finally matter. Technological excellence would be relevant! Reality would raise technologically meritorious cryptocurrencies to new heights!
Now, while I didn’t provide any timeline for this prediction, I’d now probably classify it as being too early, too immature. We’re probably another decade away from a reality where meaningful applications and technical fundamentals determine crypto champions, unfortunately.
There’s also still a crazy amount of developer resources being poured into refining core protocols, as the 1 million TPS goal seems to not have been enough at all, and cryptocurrencies seem to be stuck in constant competition with one another. This state eats up a large amount of highly qualified developers that could otherwise be spending time creating next-gen applications. And who is to say when it’ll all be enough? Presumably, tech development will only be enough when everything is so great that it is nearly impossible for the average user to discern any difference between the major crypto/blockchain protocols, and everyone else has just given up because playing catch-up with the dominant protocols would be practically impossible.
Plus, I just left the crypto space for a while. I’m not really the type of person to get hyped over the next dog meme token, and my interest lies more with the long-term vision rather than with the regular updates.
So, after all that happened, I was planning to totally retire my medium account and chill.
However —
Okay, now you can continue reading.
Recently I’ve become increasingly concerned by the direction of the discussion around DOT economics. Specifically, I’ve seen many ideas focused around making DOT “deflationary” and implementing arbitrary systems to try and manipulate DOT’s market performance, such as drastically curbing inflation rates and/or instituting a max supply cap.
Now, I am not inherently against the idea of reducing the overall inflation rate for DOT. My concern is about the extremity of some recent proposals and the fact that people are treating the reasoning behind them as if it were based on 100% objective truth (it’s not).
I am here today to argue that the logic behind “make crypto deflationary!” is largely based on speculative memenomics, and that if we do adjust DOT’s annual inflation rate, we should not do so in a way that dramatically alters the status quo.
Of course, I’m not at all opposed to changing my mind on the degree of “deflation” that should be present within Polkadot, but I’d like to see any actual evidence presented first. Until then, I’ll be dedicating some of my time to countering what I see as a popular yet extremely flawed narrative.
A Cryptocurrency Comparison.
To start, I’d like to highlight the lack of evidence for the theory that a “deflationary” system is a good thing, or that it would have the intended effect people claim it would have.
The Cosmos/ATOM ecosystem actually already had this entire discussion which concluded in a highly contentious proposal + vote that cut ATOM’s max inflation from 20% down to 10%, essentially cutting inflation in half.
This changed absolutely nothing about ATOM’s market performance. Even DOT has performed better than ATOM since, though both just tend to follow general market trends. The only thing that has changed is that those staking ATOM are now receiving ~50% less ATOM than before, which means everyone lost more than they gained.
Again, this all isn’t to say the proposal was inherently bad — 20% max inflation is a bit high — just that inflation adjustments don’t tend to have the mystical market affects that some proponents claim they’ll have.
Now, on the flip side, let’s look at Solana, which has had numerous token unlocks and numerous scandals, all on top of an average base network inflation rate of ~4–8% (it’s changed over the years). In fact, if we look solely at the circulating supply metrics, which would presumably be most relevant for market performance, we see that Solana has gone from 261.9 million SOL in 2021 to 447.28 million SOL in 2024, representing an annual circ. supply inflation rate of ~18.4%.
For comparison, here is Polkadot’s circulating supply, which I calculated to average out around ~17.16% annually. Other cryptocurrencies, for further comparison, such as Cardano and Tezos, have an even lower circ. supply inflation rate.
During this time, Solana still out-performed competitors all of these competitors — Polkadot, Cardano, and Tezos — despite having a higher circulating supply inflation rate.
Let’s try looking at the past year, a time in which Ethereum had been operating under the implementation of EIP-1559 and had been actively deflationary.
During the past year, the SOL circulating supply has gone from 394.89 million to 447.28 million, which is 13.26% increase.
Meanwhile, for comparison, here’s a chart highlighting how Ethereum’s circulating supply has actually gone down over the past year:
Of course, during this time, Solana has also out-performed Ethereum.
Ethereum, by the way, is also down against Bitcoin within the past year, despite Bitcoin still being inflationary and Ethereum being deflationary. Bitcoin’s entire meme is that it’s supposed to be digital gold, and Ethereum’s out here trying its best to be even rarer and more deflationary, while simultaneously getting absolutely toasted on the market in comparison.
Where did we go wrong? What happened to the “ultra sound money” that was supposed to usher in the great Ethereum supply crunch? EIP-1559 was supposed to be the “final puzzle-piece to Ethereum’s monetary policy” according to the great doctrine of memenomics!
In reality, it’s always been total nonsense. At no point was there any evidence that any of these “monetary policy” decisions were going to significantly affect market performance. All of it has been founded upon nothing but the art of the meme.
See, when memenomic practitioners consider cryptocurrency supply and demand, they focus strongly on the supply side of crypto economics, while totally ignoring the realities of demand. Bitcoin is up not because of some genius “monetary policy,” but because it’s the default crypto that every average investor is going to buy into if they want exposure to the industry. It’s well-known and highly-shilled. Solana is performing nicely because it’s a center of hype — strong VC backing/interest, competitive tech, a sizeable ecosystem, and a devoted community — which pushes people into buying up SOL. That’s demand at work.
Yes, there are cryptocurrencies that are competitive with Solana at a technical level, but reality tells us that there just isn’t the same demand for these cryptos. Maybe that makes people feel sad, but coping via memenomic proposals is not actually going to address the core problem.
Cryptocurrencies are highly speculative assets, forming unique market conditions (closer to tulip mania, ATM, than anything else), and we should not assume that dramatic adjustments to supply are going to cause magical changes to market reality. There is simply no evidence to support such a theory. From what I can see, history is telling us that (speculative) demand for a cryptocurrency has been the only real major driving force.
The Flaw of Memenomics.
“But if my memenomic proposal harnesses enough pure meme energy, then wouldn’t that lead to the hype necessary to improve my favorite crypto’s market performance?”
No. There is no evidence of this. There is no logic to this. We’ve already seen countless crypto communities desperately try to hop on popular narratives/trends, and they’ve failed every time.
Tezos went all in on NFTs and sports sponsorships. It went from rank 30-something to rank 98 on CoinGecko.
Algorand also decided to hop into the sports sponsorships world (“Nike”) and it didn’t work out. Algorand, once an r/Cryptocurrency meme favorite, (with a max supply cap!) has now descended to rank 72 on CoinGecko.
Cardano has a max supply cap and relatively low inflation rate. It’s also the beautiful, majestic brainchild of flawless crypto-Jesus Charles Hoskinson. It still gets out-performed by Solana and even Dogecoin. You know it’s bad when you’re getting toasted by a crypto whose entire appeal is that it has a dog plastered on it.
Not to be outmatched, Polkadot spent over half a million dollars to fund a meme coin marketing campaign that went down in flames on day one.
The idea that the crypto market can be definitively controlled by your artificially induced meme is pure hopium. Crypto market forces are random and unpredictable, not easily controlled.
The Threat of Memenomics
Yet crypto meme narratives are like a virus — they spread and spread, taking over host after host. Eventually, they will infect large swaths of a community, to the point where even those who should know better end up infected, because they feel compelled to consider the calls of the masses, no matter how irrational those calls may be.
Nearly a decade ago, I was drawn into the cryptocurrency space by the idea that we were building advanced protocols to revolutionize economic systems and empower individuals. Now, however, the crypto space has become significantly meme-infected. We have become obsessed with achieving good market performance, often at the expense of network functionality.
Bitcoin, in particular, exemplifies this plague of prioritizing memenomics over functionality. While the initial proposal for Bitcoin envisioned it as a model for “peer-to-peer electronic cash,” the philosophy of memenomics has totally distorted this vision. Over time, Bitcoin has shifted its focus from being valued as a functional digital cash system to now being valued as (competitively useless) “digital gold.”
The problem is that sacrificing functionality totally undermines the central prospect of the digital gold narrative — the suggestion that Bitcoin has some fundamental value to begin with, like how gold does in the real world. However, if Bitcoin is a system full of flaws, totally outmatched from a technical perspective compared to its competition, and entirely failing in achieving the peer-to-peer electronic cash vision outlined in the whitepaper, then what value does Bitcoin really have?
But how many Bitcoin “investors” have even read the Bitcoin whitepaper? I’m going to assume it’s less than 1% of them. Does anyone even care about the original purpose anymore? Does anyone care about the functionality of the system? Does anyone realize how far the vision has been distorted?
In the whitepaper, “privacy” was valued to the extend that it even got its own section — yet who cares about the privacy offerings of Bitcoin nowadays? They’re nonexistent. Everyone just wants to eventually exchange Bitcoin for fiat. There’s no way to even acquire a practical amount of Bitcoin without using fiat, unless you’re paying for a very expensive mining rig (+ energy costs) or using another cryptocurrency to get it.
So is the Bitcoin community now scrambling to implement new privacy solutions? Is Bitcoin rushing to turn into another Monero? No. No one cares because privacy has nothing to do with making money — which is the only thing Bitcoin holders seem to actually care about these days. And how do they make money? Meaningless market speculation, baby! People just need to regurgitate the memenomic narratives they hear on forums until they finally pressure some other suckers to buy up their bags.
It’s all so insulting to the original vision that clearly sought to build a system that actually achieved something of real value and meaning to the world.
However, the threat of memenomics isn’t just a matter of ideological differences — it also degrades the foundations of a system until there are questions about its fundamental sustainability. This degradation can be achieved manually, by creating problems, or through pure neglect, by refusing to solve problems. Oftentimes, it’s a combination of both.
As soon as Bitcoin reaches max supply, the network will be entirely reliant upon fees to incentivize miners. However, if no one’s actually using Bitcoin and everyone is hoarding it like “digital gold” then there won’t actually be any fees being paid, or at least not the healthy amount you’d actually want to see for such a system. This suddenly makes mining significantly less profitable. If mining isn’t profitable, then miners won’t mine. This can jeopardize the security and decentralization of the network. First, it’ll severely reduce the amount of miners overall, forcing the remaining ones to fight over scraps. Second, it’ll push (concentrate) mining operations into areas where energy is cheap and mining is more affordable (aka centralized).
So, overall, if we take a step back, we can observe that Bitcoin is outdated, slow and expensive, isn’t private, and it’s unwilling to address its flaws to any significant degree. It’s an empty, technologically inferior network that has abandoned the pursuit of its own founding vision in order to prioritize unsustainable memenomics that push for the creation of a “digital gold” global ponzi.
This is the future that memenomics proponents are pushing for — a future that is barren of any value and meaning beyond “crypto price go up!”
That being said, protocols like Polkadot, Tezos, Solana, Avalanche, Cardano, Ethereum, etc. are all built with inherently more functionality than Bitcoin. A prioritization on memenomic philosophical tenets, therefore, may not entirely debilitate a protocol, but only sabotage it for no good reason.
Let’s look at Cardano — your traditional-enough layer-1 crypto with a max supply cap.
Hypothetically, from a “store of value” perspective, the max supply cap is supposed to reward ADA holders. The idea is that a limited supply will increase the value of each individual ADA, as new ADA can’t be introduced to the system past a certain number. It’s all pretty straightforward stuff. There’s no deeper meaning to it.
Now, we’ve never actually seen this “max supply = more value” theory play out, of course. However, even if we assume that the idea has merit, and that it does meaningfully contribute to the value of ADA, it still comes at the cost of sacrificing Cardano’s own economy.
A max supply cap necessitates that staking and validating (aka powering & securing the network) must be entirely incentivized by fees. Consequently, Cardano will consistently require higher fees, all else being equal, compared to cryptocurrencies that don’t institute max supply caps. These fees would discourage users and businesses from using the network, as they would obviously prefer alternative networks offering, practically, the same functionality at lower costs. So, even under the assumption that a max supply system would encourage an increase in ADA value, it would still simultaneously decrease value by reducing the demand for actually using the Cardano network.
Memenomics.
A Focus on Functionality
I thus present my alternative to memenomics — that instead of making arbitrary decisions based on unsubstantiated hypotheses on increasing a coin’s value, we instead make decisions based on what is best for a cryptocurrency’s functionality.
Don’t get me wrong, a focus on functionality still brings value, but it’s sustainable value created via demand. It’s about creating a quality system that has real worth and meaning to people, that people will actually use because it offers good services.
Value via demand can scale infinitely assuming the infinite growth of the human economy, or, assuming the economy stagnates, it can at least achieve a relatively stable value balance without entirely collapsing (unlike memenomic coins, which would actually face collapse). Meanwhile, creating value via decreased supply could severely threaten demand, and threaten the core functionality and security of a cryptocurrency network.
“But what about the sell pressure from inflation via staking? Isn’t that a negative for the network?”
No! Cryptocurrencies are meant to be bought and sold — they are meant to be used, not merely hoarded. The indoctrination of the idea that cryptocurrencies are instruments of mad speculation and wealth accumulation first, before anything else, is the penultimate objective of the memenomic virus.
You can’t have a working economy where everyone hoards and no one uses. That’s why deflation is such a killer for fiat-based economies. We shouldn’t lose sight of these principles for crypto-based economies as well.
Sure, focusing on functionality might mean that a cryptocurrency doesn’t achieve the same degree of wild, speculative gains that other cryptocurrencies might achieve during these times of immaturity for the industry. However, I would argue that a more functional, in-demand system (with applications that are practically useful to everyday users) means a more sustainable system — which ensures value security over the long-run.
Reducing speculative price swinging and bringing about long-term value security might even bring us to what should actually be the penultimate aim of crypto: stability. That stability means a system where everyone can be gradually lifted through economic growth, rather than dishing out winners and losers via a big speculative gamble.
Polkadot and CoreJam.
So what does all of this mean for Polkadot?
Well, I think the best place to start the conversation is with a brief look at OpenGov proposal #706 titled “Reducing Inflation” — which you already know is gonna contain spicy memenomic ideas, just based on the title alone.
First, I love the fact that the third sentence is totally honest about how arbitrary the supply cap is, and hits us with the “because it’s a funny number and it’s related to Bitcoin.” Great memery at work!
Now, based on everything else I’ve said in this article, you’d likely conclude that I think this proposal is complete nonsense. You’d be half right. I do think it’s nonsense. I think that the claims made are unsubstantiated. I think the logic is flawed. I am against passing this proposal.
However, it’s not complete nonsense —only because of CoreJam and the future of Polkadot.
First, let me provide some background.
Polkadot is not designed to be a layer-1 crypto like Cardano, Algorand, or Bitcoin. Polkadot is designed to be a layer-0 that provides coretime, blockspace, which it then (essentially) sells to layer-1s. Right now, blockspace is determined via parachain auctions, where DOT is locked but not burned.
Polkadot’s current 10% (non-dilutive) inflation rate was chosen in order to balance user incentive for staking and user incentive for participating in parachain auctions. On one hand, Polkadot had to maintain its security with a healthy amount of users staking. On the other hand, it had to encourage users to actually use and lock DOT. If DOT users could make more money staking than they could with parachain auctions, then they’d gravitate towards staking. If DOT users could make more money on parachain auctions, then they’d gravitate away from staking. That’s why the inflation rate is so high — to keep enough people staking and securing the network.
However, “Polkadot 2.0” is proposing to change how DOT is used. Parachain auctions are going away. Instead of being locked, DOT will be burned in exchange for coretime. This changes the fundamental dynamics of the system.
The implementation of “Agile Coretime” is the first step towards this vision. CoreJam is the final stage, which should complete the transition to Polkadot 2.0 — and totally evolve the network.
Now, because the dynamics are changing, it makes sense to reevaluate what would be the most appropriate inflation rate for Polkadot. Keeping the inflation rate so high at 10% might be entirely unnecessary. However, reducing the inflation rate might not actually produce any results aside from giving people less DOT.
Additionally, if we do decide to reduce DOT’s inflation, how are we going to determine the right rate? Once Agile Coretime begins, there likely won’t be so much demand that DOT becomes deflationary. However, if we reduce the inflation rate significantly, and there is strong demand for DOT in the far future, then more DOT might actually be burned than produced. If such a trend continued, then it could lead to price instability, which would be a negative for the Polkadot economy.
To top all of this off, Gavin Wood has noted that there is good reason to make DOT economics “constrained” and harder to alter. Under the conditions of such a proposal, it would be incredibly important to have an economic system that is correct, flexible, and sustainable.
So what do we do?
I think it would be unfair if I spent this entire article pointing out the flaws in other systems, only to refuse to put my own skin in the game. After all, it’s only right that other people have a chance to criticize my own inventions.
Therefore, I’d like to propose an idea for DOT tokenomics under CoreJam.
What I propose is not a supply cap, but a supply target.
We’ll enter CoreJam with our typical inflation rate of 10%, which is the only number that DOT holders have reached any consensus on at any point in Polkadot’s history so far. The supply target will be whatever number of DOT have when we adopt CoreJam. As the total number of DOT increases above supply target, the inflation rate for DOT will drop. In fact, the inflation rate should have the ability to fall indefinitely. However, when we eventually reach the point that more DOT is being burned than produced, then the inflation rate will rise again — and it should have the ability to rise indefinitely, so that we can even surpass 10% inflation if we fall below our supply target.
The purpose of this system is to create economic stability by balancing supply and demand. If there is no demand, we constrain supply. If there is excessive demand, and not enough supply, then we provide more supply.
The system is designed to work hand-in-hand with Polkadot’s core functionality, rather than jeopardize it. Supply can be managed in a way that both attracts more people into the ecosystem when necessary, and supplies the ecosystem when necessary. It’s a system that is flexible and adaptable to the circumstances presented to it.
Conclusion.
In conclusion, memenomics is bad.
No single idea is inherently memenomic — but rather, memenomics is a matter of using flawed logic to try and justify decisions that are purely made on the basis of a meme.
When we’re considering how to structure crypto economies, we should prioritize functionality instead of speculative price performance. Everyone will eventually benefit from the economic growth brought in by a system that people actually want to use because it functions well. Systems that only pursue short-term profit will inevitably become empty, barren, and meaningless to the world.
Polkadot has a bright future ahead of it. If we can decide on a functional economic model that promotes long-term sustainability, the Polkadot ecosystem will benefit greatly from it.
