Cryptocurrency loves the idea of capping tokens. This stems from Bitcoin and the 21 million hard cap. Unfortunately, this is rooted in misunderstanding while not taking into account a number of important factors.
Due to this, many feel that an inflation rate on a coin or token is bad. Most often the question is what is the yearly rate. Once receiving the answer. Obviously, a coin or token with a lower inflation rate is better. That is the extent of the research.
Of course, this leaves a lot of holes in the analysis. Like most things in the economic and financial world, it is a lot more complex than people structure it. The tendency is to focus upon individual, simple ideas that make great memes but rarely are effective in the real world.
Here we have decisions made in a vacuum. This can be very dangerous as we found out during the ICO craze. Back then, many discussed the inflation rate and how projects have better tokenomics. Where are they today?
So let us look at the different variables and why we need to have a more expansive view.
How many times have we heard different iterations on "we have better tokenomics"?
This appears to be the focus of many projects. Quite frankly, this is really secondary. The tokenomics of a project is really of little consequence. Unless it is something completely outlandish, this is down on the list of priorities. In fact, others factors can make it almost non-relevant.
Of course, discussions like this cannot take place without the proverbial token burn. People are so obsessed with burns they even promote it. The idea that burning money is a good thing is lost on me.
Much of this originates with the idea of price go up. People only want to see the price of their token rise and reducing supply, so we are told, will accomplish this. So let me ask you, how many projects had token burns, promoted them, and the price is still in the toilet?
Since we know the list is lengthy, there has to be something else to all this. We see the "best tokenomics" end up failing.
The burn idea is backwards thinking.
Let me state this: burning tokens is not going to get people to buy. This might cause some to HODL but it does not incentivize people acquiring it. In fact, in the end, it ends up causing people to lose.
The reason being is that, if we are operating from the mindset of price go up, this is backwards thinking.
To understand this, we need to isolate what we are dealing with. Most coins and tokens are value capture. This means they are there to mirror the value of the system. The medium of exchange case is minimal. We can take Hive as an example. $HIVE is used less frequently than the Hive Backed Dollar (HBD).
We can see the logic in this. If a coin is going to 5x, why would I want to use it for payments. The reality is I will want to HODL and use something that will basically be worth the same 2 years from now. Here is where stablecoins enter.
Thus, if most coins and tokens are value capture, what will make the price go up? If we look at the other value capture asset, stocks, we can see clearly.
While stock buybacks do get the market excited, what really gets them going is stock splits. Here we see markets go crazy when they are announced. This is the case simply because people realize each $1 move up will be more profitable.
Of course, as with everything there is a catch.
Who uses stock buybacks?
Naturally, this is done by many types of companies. However, zombie corporations got a lot of attention. These are companies that have little to no growth, a lot of debt, and yet are able, through financing, to keep buying back their stock. This, of course, reduces the circulating supply, hoping to push prices higher.
In reality, we are dealing with death. There is no life to these entities. They are simply withering on the tree. People realize this although many buy into the concept, less supply means price goes up.
We see the same mindset in cryptocurrency. Death is the same regardless of where you find it.
While hot companies often do buybacks, they split with greater frequency. The reason is their price is usually going higher. A split will make the stock more accessible. Yet, notice the price is already moving up regardless of the amount outstanding.
This brings us to the missing caveat mentioned earlier.
The missing ingredient in all this is growth. Here is where we see the rubber meet the road.
Companies that have rising stock prices tend to be those that are growing. Their numbers are improving on a regular basis. The ones that split the most often are the high growth stocks. These entities are see a fabulous annual growth rate, something that gets eventually gets reflected by the market.
High growth is a sign of a strong business. This is common sense and something most can follow when thinking about this market.
How come the same approach is not applied to cryptocurrency? How often do you see a project mention its targeted growth rate? While getting the overall numbers (for the industry) can be difficult, specific projects can reveal their internal metrics.
Yet this is something we rarely see discussed or promoted. Instead, the tendency is to post the token burn information on social media.
Do you see the disconnect?
Growing the project, platform, or ecosystem is crucial. This is something that separates successful projects from those that are not. It all starts with development and the mindset to build. If this is not taking place, bet the ranch things will not be much different a couple years down the road.
Here again, death is present.
Those with growth, however, can see progress. Their numbers are improving and advancement taking place. Naturally, there are a lot of ways to look at this meaning it will be individual to the different teams. However, we need to see more than just announcements of token burns.
After all, if you burn all the tokens down to 1, and it is tied to a dead project, you essentially have 1 token worth zero.
So why it capping a token a bad idea? Here is where incentivization enters.
To start, inflation rates always have to be considered in light of growth. What is the rate of each?
For example, if the inflation rate on a coin or token is 10%, yet the growth rate is 400%, that is easily going to swallow up the inflation. This is something that is well known yet rarely applied to cryptocurrency. It is the reason why those that do not discuss growth rate should be viewed with caution.
Which brings us to the second point: inflation is an incentive mechanism.
This means that the new coins or tokens created can be used to incentivize the community to perform certain acts. This can be in the form of governance, provide infrastructure, or to have a larger network effect. Regardless of what is required, incentives are needed. Projects without that end up withering away as more options are created.
When looking at Web 3.0, one of the major factors is the ability to incentivize in ways that Web 2.0 cannot. This is a result of tokenization. Of course, ecosystems have to focus upon all levels since a lot is required. This means that it takes on even greater importance in the decentralized world.
Without incentive through tokenization, many of the traditional methods will be turned to. This can be effective yet tends to create centralization. After all, who is going to provide infrastructure without payment? The answer is nobody. Thus, if there are no payouts, something else have to be provided. Here we see large entities that monetize through control, data gathering, and other factors that make users unhappy.
It all gets changed with Web 3.0 yet only if there are incentive mechanisms in place.
In the next article we will discuss the fact we operate in the digital world and this changing the game entirely.
If you found this article informative, please give an upvote and rehive.
gif by 
logo by 
