Deep Dive: Deflationary Tokenomics & Token Burns
A little deflation sounds pretty nice right about now, doesn’t it? With rising home, fuel, and cost of living expenses all across the globe, almost everything is more expensive today than it was a year ago. Some things are astronomically more expensive. Yes, inflation is here in a big way for the first time in 40 years and many are left wondering when prices will stop rising and things will start to feel affordable again. Unfortunately for those Zoomers who are hoping for a housing crash, the global macroeconomy is dependent on inflation and central banks will continue to do everything in their power to ensure that we do not experience deflation. As per usual, it’s up to the super coders of the cryptocurrency world to experiment with how a deflationary money supply can affect prices.
Investopedia defines deflation as “a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy”. However, that definition leaves out an important concept: that prices are measured against a “numeraire”; something that always is always set equal to one in an economy for the purpose of calculations. In the macroeconomy, this would generally be your local currency. In the crypto economy, this is your native coin. And for GamiFi, that would be our token, GMI. With this definition in mind, as well as laws of simple supply and demand, the decision to experiment with deflationary tokenomics begins to make sense. Indeed: if the price of a native token is our numeraire, then a “general decline in prices for goods and services” means that the token price is increasing.
There are various ways to implement deflationary tokenomics in a cryptoeconomic system. Primary among them is, of course, the token burn. Burning tokens means to permanently remove them from the supply. However, a token burning mechanism does not necessarily make a tokenomic system deflationary, as there may be new supply issuance in concurrence with token burning, as well as the fact that inflation is always measured in year-over-year percentage terms. Despite claims that Bitcoin is an inflation hedge, Bitcoin actually has an inflationary tokenomics design that incentivised the growth of mining hashrate early on. This has settled to a predictably low inflation rate until the entire supply has been mined far in the future, during which time the total supply may actually become deflationary due to factors including lost private keys, hard drives and passwords.
GamiFi’s recently announced Mystery Box NFTs implement a unique token burn mechanism wherein the 25,000 GMI sale price, plus an additional 25,000 GMI match from the GamiFi team, will be burned. This token burn mechanism has the intention of reducing supply of GMI tokens while simultaneously offering something of distinct value, as opposed to burning all transaction fees or charging a transfer tax, for example. Furthermore, it offers users an opportunity to affect token emissions through their own actions and, based on the NFT received from the mystery box, their own fortune as well. Lastly, the addition of this token burn mechanism, rather than inclusion from the get go, could constitute a supply shock by removing tokens from the market.
All things considered, deflationary tokenomics are well worth considering, with even large cap coins like Ethereum moving to a token burn model that will significantly reduce token emissions — more so than any Bitcoin halving ever has. Will such systems work in the long run and reach an equilibrium inflection point where the token burns are greater than incoming demand? Only time, and a desire to break away from the economic systems that have ruled the world for many years, will tell.