Is Algorand inflation its biggest enemy?

1

The majority of attention and resources (capital, developers, etc.) in the crypto market is supposedly allocated based on “how much a coin has a chance to survive and become a major player in the next few years?” There are many parameters that one can look at to answer this question: the tech, team, community, scarcity, price action, exchanges transaction volume, on-chain transaction volume, number of (active) addresses, P/E (based on the network profit), developers activity, TVL, etc.

The reality is that answering the above question is difficult (or even impossible) and most people (including large investors and WS) look at the coins ranking and price action in the market as a way to make their bet. This approach feels much safer to them and also provides a good support for whatever narrative the coin has. A coin chance in attracting investors exponentially decreases as it goes down the (coinmarketcap, which is the most popular) ranking list.

The Algorand approach has been to increase the bottom-up adoption by providing superior tech, improving the dev experience, etc. Recently we have also seen a focused effort in increasing the network TVL by the foundation. However there is a big elephant in the room that hasn’t been addressed yet and that’s the Algorand inflation. This is particularly important when Ethereum as a major L1-competitor is going to be deflationary (you can debate that it depends on tx volume, etc. but not the point here) and a few cycles ahead in distribution and development. With the merge Ethereum is going to fill one of the major technical gaps and even become a real threat to the bitcoin kingdom.

Please note that the concern here is not the price action (or wenmoon!) but the lost opportunity/time cost. The question is how long does it take for Algorand to become one of the 5 or at least 10 top coins? Is it one year or five years? The latter may never happen because that’s a long time for other (existing and new) chains to fill the technological gap and further establish or grow their market position.

If you are an investor and know that ~3B more algos will enter the circulation until 2030 (or 2034), that means you may have much more time to decide whether you want to invest in Algorand or not. There are likely better other opportunities for a 5-year time horizon unless you think that the algo price will be much higher and you basically lose the train if you don’t invest now.

Now, is it possible to address the inflation issue? This is a hot topic not just because of its importance but the fact that there are plenty of strong opinions in the Algorand community about it. Here I don’t intend to provide a polished final solution but some ideas that can be considered by the foundation and community. A final proposal needs several revisions after receiving feedback from the community similar to the recent foundation DeFi proposal.

Ideas:

  1. Cap the inflation based on the price action. For example, for the next 6 months the inflation remains the same, however if the price doesn’t hit $1 by the time, the inflation is decreased to half (kind of random, the actual number needs careful analysis). This approach can continue for every $ up. The idea here is that there are enough investors out there that are convinced about the Algorand tech superiority but concerned about the inflation and their investment returns. This inflation adjustment should mostly alleviate that concern. The total number of in-circulation Algos will be eventually 10B as it is planned today.
  2. Burn 1B (or even 2B) algos now and keep the inflation as is, which means the distribution ends a few years earlier, or reduce the inflation and keep the end of inflation-era as 2030. The assumption here is that the price increase would compensate for the reduced number of received tokens by the foundation, ecosystem and governance funds.

On Reddit

Update

Comment:

Assuming full 10B by 2030, current inflation is something like 5.4%. In two years, it will be 4.8%. These are not big numbers considering upside potential. Also, if you participate in Governance you get all this back and then some. It really is a weird complaint to me.

Response:

Two points:

  1. It is all relative. If/when Ethereum is deflationary then 3B which is 30% of total supply seems a lot.

  2. What you said contains a lot of if, which is not incorrect but not obvious to most people, particularly if new to Algo. It is good to have a table in the algorand tokenomics page that explains it. And the response to the point #1 could be that the Algorand growth, which is 100 times smaller than Eth, would compensate for the 4/5% inflation. The issue is that we haven’t seen the growth effect on the price action yet which makes the argument hard to sell.

2

I think the foundation needs to know how much money it needs yearly for expenses and take that money out yearly not gradually throughout the year. kind of like dilution in stocks, companies usually say when they are going to dilute and do it in one lump sum.

Algorand can let us know yearly what they need for expenses yearly and take it out at beginning of the year and after that inflation only comes from governance rewards. dumping coins gradually during a bear market isnt the best approach.

3

This is an interesting discussion. Algorand, unlike most PoS blockchains, has a max supply limit of 10 B, whereas many others have an infinite one. In order to have a functional and secure blockchain, validators must be rewarded and this can be achieved through a transaction fee or the issuance of tokens, the so-called inflation. The latter causes the max supply to grow indefinitely, which is why many blockchains have implemented a transaction fee burning mechanism to reduce it. Since Algorand will have a circulating supply equal to the total and max supply by 2030, I see no other way to reward validators other than through the transaction fee (and I believe this is the reason for not implementing a burning mechanism).
At the moment the circulating and total supplies are about 7.92 B which corresponds to a constant token issuance of 3.46% for each of the remaining 6 years (the actual value decreases over time).