Direct from the desk of Dane Williams.
Polkadot’s DOT token does not burn enough tokens to be considered deflationary.
Aiming to connect multiple blockchains into a single interoperable network, Polkadot (DOT) is one project with a ton of potential.
In saying that however, there has been some confusion regarding whether the DOT token is deflationary or not.
We seem to have a belief in some quarters of the internet that Polkadot burns coins to reduce its supply over time.
But be careful what you read…
In this post, I’ll explore the truth behind this claim and answer the question: Does Polkadot burn coins?
Polkadot is inflationary
The short answer to the above question is no, Polkadot does not burn coins to the extent that it can be considered a deflationary token.
In fact, Polkadot is an inflationary token that is designed to increase its supply over time.
The Polkadot whitepaper clearly states that the initial total supply of DOT is 10 million, with an annual inflation rate of 10% for the first four years.
Inflationnnn!
While some users may view inflationary tokenomics as negative, Polkadot's inflationary model is necessary to not only fund the development and maintenance of the network, but to also facilitate growth.
The token serves as the fuel for the network, allowing it to function and grow.
Relax, inflation is not a dirty word when it comes to blockchain networks with genuine use cases.
Polkadot governance doesn’t burn coins
Moreover, Polkadot's governance system also incentivises token holders to participate in the network's decision-making process.
Similar to Fantom, each DOT token carries one vote and voting isn’t free.
This means that any decision made on the network must first be approved by participants with stake, something that gives them control over the future roadmap of the network.
Although Polkadot's governance system doesn't burn coins to the extent that it can be considered deflationary, it does have a unique mechanism that could potentially reduce the supply of DOT over time.
This mechanism is known as the "staking unbonding period," where users who stake their DOT cannot withdraw their funds immediately after unstaking.
Instead, there is a waiting period of 28 days before the DOT can be withdrawn.
During this period, the staked DOT is not included in the total supply of DOT, which means that the supply of DOT in circulation is temporarily reduced.
Maybe a technicality, but something worth mentioning nonetheless.
Could DOT re-denomination ever be deflationary?
When it comes to questions around Polkadot’s inflation, the issue of re-denomination is another angle that often comes up.
Re-denomination is a process where a cryptocurrency project increases or decreases the supply of its tokens by changing the value of each individual token.
The purpose of re-denomination is to make it easier to transact with the cryptocurrency by adjusting its overall price level.
Polkadot recently went through a re-denomination process, where it decreased the supply of DOT tokens by a factor of 100.
This had the effect of increasing the value of each DOT token by the same factor.
Ultimately this meant that if you held 1 DOT token before the re-denomination, you now hold 0.01 DOT tokens after the process.
The purpose of the re-denomination was to make DOT more accessible to users and reduce the barriers to entry for new investors.
Before the re-denomination, the high price of DOT made it difficult for small investors to participate in the network.
However, with the new lower price, it is now easier for investors to purchase fractional amounts of DOT and participate in the Polkadot ecosystem.
But what does this mean for the deflationary potential of DOT?
In theory, re-denomination should not affect the deflationary potential of the cryptocurrency.
While the total supply of DOT has decreased by a factor of 100, the overall value of the network remains the same.
Therefore, the deflationary potential of DOT is still determined by the mechanisms outlined in the whitepaper and not by the recent re-denomination process.
It just depends how you look at it.
Final thoughts on Polkadot burning coins
While Polkadot does not burn coins to the extent that it can be considered deflationary, it does have a unique mechanism that could temporarily reduce the supply of DOT.
Nevertheless, Polkadot remains an inflationary token that is designed to increase its supply over time.
Polkadot’s inflation is a design feature, not a drawback.
Remember, inflation is necessary to fund the development and maintenance of the network.
As Polkadot continues to grow and expand its ecosystem, its inflationary model will play a crucial role in sustaining growth and ultimately ensuring its long-term success.
Best of probabilities to you.