Deflation In Crypto-economics: The Stateless & Deflationary NFT Problem
In economics, deflation is defined as a decrease in the general price level of goods and services. But when talking about crypto-economics, usually “deflation” is more related to a situation where its number of tokens has a monotonous tendency to grow over time.
The maximum quantity of a cryptocurrency can be connected to deflation. The term “deflation” refers to the maximum amount of Bitcoin. There will only ever be 21 million Bitcoins in existence, and no new coins will be minted as well as no rewards paid out. Because most cryptocurrencies have a fixed supply, the quantity of money available is finite. Cryptocurrencies achieve their deflation by slowly creating new tokens until all tokens are mined or minted. The assumption of deflation across crypto-economics requires that the cryptocurrency supply remains constant after mining is complete.
What is a “stateless” token?
A stateless token is a cryptocurrency that has no associated database or account. Stateless tokens are not bound to any address on the blockchain, hence they do not have an associated balance. This allows transactions to be verified without requiring previous account balances. The total supply of a stateless token can be computed by summing the individual value of each transaction.
The Effects Of Mining For New Coins
- It adds more currency to the economy, and
- simultaneously increases the difficulty of mining until it reaches an equilibrium where no additional miners can be added without making it even harder to mine new blocks.
Mining secures transactions on the blockchain by incentivizing miners with rewards, typically in the form of a Coinbase transaction at protocol level (which means that its generation is not tied to user account balance).
Can a central bank regulate a protocol with a fixed token supply?
The concept of crypto-economics tries to answer the question of whether or not decentralized systems can operate without a central bank?
NFTs are unique in that they have no fixed supply. So how do NFTs have value if there is no fixed supply, and how does one prevent them from being infinitely copied?
Sustainability means that there needs to be some reason for demand dependent on real-world utility, resulting in scarcity. For example, gold has an inherent value because it is scarce. But what makes virtual objects valuable in general? It may appear odd since duplicating digital files is so simple. However, this ignores the effort people put into making these assets, which includes thoughtfulness and also labour costs. The ability to create digital scarcity means that a new asset class can suddenly appear, and NFTs are a great example of this.
NFTs are already taking the world by storm. When a virtual object is created, it’s initially owned by the creator who made it. If they want to be able to sell it on an open market, they need some way to prevent people from copying it. In most cases, each unique item has its own identity which cannot be copied or duplicated. A user will only know about this uniqueness if the object behaves as expected when interacting with other users. There are different ways of doing this but making sure that authenticity cannot be faked is key — otherwise, why would anyone buy them?
What is the biggest concern about deflationary tokens?
The biggest concern of deflationary tokens is the issue with stateless and deflationary NFTs.
When new tokens are minted, their ownership is distributed among all the accounts that currently hold tokens. This means that whoever holds a token can get a share of newly minted tokens proportional to how many they already hold, so they get rewarded for holding more than others. However, this also means that if you send your token to some other account, then the total supply of that token type would decrease and whoever’s holding it next would receive a smaller amount if someone else sends them one later on.
What will happen to the price if there is no more supply?
If you assume deflation and unlimited supply both lead to infinite inflation (cost of producing a token and value of a token), which is generally true in most cases.
When a new NFT comes into existence, the cost of producing that NFT is negligible. This means that they can be infinitely copied and thus have no scarcity. The only way this would not happen is if the tokens are made scarce by attaching them to real-world assets (similar to how diamonds cannot be infinitely reproduced because their supply depends on mining). These would then need to attach some other kind of utility or significance in order for people to want them, otherwise, they won’t necessarily hold any value outside of the ability to sell them for money.
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