One of the most commonly asked questions I see within ICON social channels revolves around a highly dissented topic. That topic is inflation. In this post, we'll discuss what inflation is, if inflation is "bad" for ICON, and lastly, take a look at other protocols utilizing inflation positively as a blockchain-based and incentivized funding mechanism.
What is Inflation?
Without intending on being overtly redundant, inflation is a pretty easy concept to grasp, at least generally. In economics, inflation represents a quantitative measurement of the rate at which the average price level of a basket of selected goods and services within an economy increases over a certain amount of time. Additionally, it indicates a decrease in purchasing power over time. On the opposite side of the spectrum is deflation, which occurs when there is a general decline in the average price level of a basket of selected goods and services within an economy.
The clearest example of the impact of inflation can be found within modern day Venezuela. Venezuela has the most oil reserves in the world, even more than Saudi Arabia, and to put the nation's dependence on oil in a brighter light, Venezuela is reliant on oil for a whopping 98% of its total export earnings according to an OPEC member. However, due to widespread corruption, falling oil prices, and socialist policies that abound Venezuela, the economy has struggled and gone through a drastic period of hyperinflation.
There are a few causes of inflation and different approaches as to how it's measured, but, it is an important issue and it can have both positive and negative effects, as we see with Venezuela on a nation's economy and consumers pocketbooks. For the sake of this post, we will focus solely on blockchain-based networks, in particular, Delegated Proof-of-Contribution (DPoC) protocols like ICON, and discern why inflation is a necessity.
Is Inflation Bad for ICON?
In Proof-of-Stake (PoS) protocols, inflation is required to maintain the economic and monetary health of the network. Generally speaking, not all inflation is "bad". There are many arguments that show inflation positively incentivizes users of DPoC protocols like ICON to contribute to the network and get rewarded (in ICX). One of the main examples of this being "good" for ICON is staking and Ecosystem Expansion Projects (EEP's).
The whole reason for why inflation is "good" for ICON all boils down to incentivization and sustaining network health. Through staking and contribution driven initiatives like EEP's, money (ICX tokens) is paid out as incentives used to grow the ICON network. Therefore, there is no maximum supply for ICX.
Inflation is needed to sustain network health. It incentivizes people to stake and is the whole basis of securing the network. Furthermore, as long as the staking reward rate is higher than the inflation rate, ICX tokens are not being "devalued". It's in this sense inflation is not "bad", rather a crucial necessity needed to sustain network health within ICON and other PoS networks.
Have Other Protocols Positively Utilized Inflation?
In short, yes. Inflation and increasing the token supply play a vital role in sustaining network health and provide the necessary economic incentives to encourage people to secure the network. In fact, over $4 billion in funds has been staked on PoS protocols according to a recent finding by Diar. The saturation of PoS protocols which provide an unending flow of passive income boast not only economic incentives, but also may provide a hedge against a potentially downwardly spiraling economy.
However, most notably of these PoS protocols to positively utilize inflation, is Tezos. Tezos is a self-amending cryptographic ledger which utilizes a Liquid Proof-of-Stake (LPoS) consensus mechanism. In essence, whatever new tech comes out in the future, it can be pushed into the Tezos protocol via on-chain governance through the amendment process. Within the amendment process lies a relatively new form of a blockchain-based funding mechanism known as inflation funding.
Hopefully this post helps those better grasp why inflation is not "bad" in ICON and shed some insight into other projects that have positively utilized inflation.