This is an interesting concept to think about. Have you ever wondered by the "unlimited money printing" by central banks is going to lead to hyper-inflation, according to some, yet the same case is not made for cryptocurrency?
Of course, this is not true for everyone. Some Bitcoin Maximalists made the same accusation. They believe that Bitcoin is the only answer since it is deflationary, albeit ignoring all the historical flawed of fixed money systems.
Nevertheless, cryptocurrency does have the ability to "print money out of thin air" with absolutely no limit to the upside.
Nothing gets people so excited in the crypto realm as the announcement of an airdrop. This is one thing that gets people's juices flowing. Why is this? Because it is free money of course.
Perhaps we should start calling the airdrops "helicopter money" because that is exactly what it is.
Here again, it is odd that people do not see the correlation.
Many have now termed inflation to mean the rise in prices. Essentially, it is the condition of too much money chasing too few goods and services. This causes prices to go up. Of course, the focus is always upon the demand and few ever look at the supply. Leaving that aside, we can easily see how with the ability to print money by anyone, that we will encounter a situation where there will be too much money for too few goods and services.
We simply cannot produce raw materials and physical products fast enough to offset the enormous surge in money that will come from cryptocurrency. Even if we leave the airdrops aside, which will not stop, we can see how the expansion rate of the existing currencies is exploding. All are operating on some kind of distribution system, pumping out more tokens, at most, every few minutes.
Ironic this is the scenario that people fear with fiat currency, leaving aside the fact this is not how central banks and quantitative easing operates.
Here we see a topic that is ignored in relation to this discussion. However a liquidity crisis caused by monetary policy is more fatal than inflation. This sets off deflationary trends that are impossible to reverse. Just take a look at what happened to Japan the last 25 years in terms of their deflation, albeit not derived from a lack of liquidity.
What cryptocurrency can do is to alleviate one of the biggest mistakes of the last 20 years: the USD liquidity crisis. Due to the fiscal and monetary policy of the United States, the global economy is lacking the Dollars necessary to maintain a healthy expansion rate. Hence, we have slowing growth rates all over the world.
This scenario was brought up on the latest Leofinance AMA regarding the LEO token. Even though this has over a 20% annual inflation rate, it was noted how there are not enough tokens available for all the different liquidity pools that are being established. In other words, as more use cases are presented, there simply is not enough free floating LEO for people to put their hands on.
But would this work across the board? While one project suffers from a lack of liquidity, could that happen within the entire realm. After all, this is the case with the USD.
As noted in Cryptocurrency: Ledger Monetary System Succeeded Years Ago, we already saw a multi-decade ledger system in place that could expand without a central bank and operated completely without oversight. Yet, today, the Eurodollar system is contracting due to a shortage of USD internationally.
Nevertheless, this does not create money in the same manner as cryptocurrency since it is still credit based. Hence, liquidity is not a problem yet inflation could be.
The reality is liquidity can become a problem, thus we need all the tokens we can get. People do not realize the era we are operating in and the event it has on this equation.
Simply put, we are in an exponential technological era. This is something that few can dispute. The explosion of technology is all around us.
What this means, by definition, is that we are also in a massive deflationary era&+. Technology is deflationary by its very nature. As it expands, costs are driven down unless there is some artificial barrier like a monopoly. Even in this situation, the impact is only delayed as the obstacle is worked around.
Looking at the balance between inflation-deflation, we can understand a lot of money is needed to offset the downward pressure due to technology. Some might believe that massive deflation is a good thing. Look at the Great Depression, a period of long term deflation, for reference of what life is like during that period. Not exactly a lot of expansion in most people's lives during that era.
Money is a tool of collaboration. This is basically the fuel for the economic engine. It is what enables all the new development we see taking place. Innovation has to come from somewhere. People want to be paid. Resources are bought. Prototypes build. Do people think this is possible without money? Where is all of this going to come from?
Of course, when this money goes into technological development, guess what it creates? More deflationary pressure. Therefore, we find ourselves on a continuous loop. The only way to stop it is to cease bringing technological innovations to market. Naturally, that would be very bad for society.
The situation mentioned with Leofinance is not unique. In fact, it is already happening across the cryptocurrency industry. The reason why we will never see "too much money chasing too few goods and services" is because we keep expanding what is offered.
There is a saying in real estate, "you cannot create more land". Well, that is not the case.
Over the last few months, we saw plots of digital land go for millions of dollars. This is money that could be used for cars, boats, or homes which never made it to that realm. Instead, it remained in the digital, being spent basically on NFTs.
While the plots in that particular ecosystem are scarce, the totality of plots of digital land is unlimited. Each new game adding that feature has the potential to sop up even more cryptocurrency. Of course, that could be spent on the aforementioned physical items, or it could remain in the digital world buying more Bitcoin, Ethereum, or whatever people decide.
The point is we are seeing our digital options expanding exponentially. We already achieved a state where the opportunities exceed the resources each of us has. In short, we have more choices than we can choose from.
It is a situation that will only keep growing. This is not going to slow down. If anything, as more developers enter the industry, there will be more projects hitting the open market. All of these will enable us to get involved, providing another outlook for our monetary resources.
Thus, if one defines inflation as the increase in prices, we are not going to see this happen over the extended period. The expansion of technology in general, and in the digital realm in particular, is occurring such a rapid pace that trillions of dollars are required just to keep up. Throughout this decade, more than $100 trillion is going to be required to simply offset what is being generated by technology.
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