Analysis of DEX Inflation Via Yield Farming Vs. Token Price
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Inflation is not only an important variable in monetary policy in the economy, but also important in crypto. Inflation is the easiest way to fund development. This forces holders to indirectly pay for development through the loss of value or ownership of the token over time to the protocol.
Inflation is usually referred to via a token release schedule; the researcher actively recalculates it.
What Is Inflation?
Inflation in traditional economics refers to the increase in prices of goods. Inflation in token economics refers to the increase in token supply.
Inflation is the persistent increase in the general price level of goods and services over time and the value loss of a currency. When the general price level rises, a unit of currency buys fewer goods and services than in the past. Thus, inflation reflects a decrease in purchasing power per unit of a currency. In the economy, inflation is affected by many factors such as demand-pull, cost-push, structural changes and import and export, etc.
In the crypto space, inflation is the issuing of new crypto/tokens into circulation which puts selling pressure on them. In theory, their value should decrease with an increase in supply, if demand is constant. Inflation in the crypto space is mainly affected by the increase in the supply of circulating tokens.
Token Issuance Model
The only impact on inflation is the issuance of tokens into circulation. Token inflation is used to bootstrap growth or to start a community. In this section we are going to find the answer to this question: which issuance models have been used so far in crypto space?
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While inflation should theoretically reduce the value of a particular asset, in a strong bull market, enough demand can still outweigh the selling pressure from inflation.
You can clearly see this in the inflation chart (monthly) of Sushiswap. Despite the huge inflation in the early stages to incentivise users, the value of $SUSHI is increasing rapidly. This is something interesting in the crypto space.