The other side of the token issuance mechanism: How inflation affects the liquidity of crypto assets

At the recent DevCon conference, Mike Nueder's speech "ETH is Permissionless Money" sparked widespread discussion. By comparing the inflation data of Bitcoin, Ethereum, and Solana, he revealed a question worth pondering: Are we oversimplifying the inflation problem of cryptocurrencies? Behind this question, there are profound revelations about the valuation and liquidity of crypto assets.

In the crypto market, inflation rate has always been one of the core indicators that investors pay attention to. People are accustomed to directly comparing the inflation rates of different tokens, as if it is a simple number that can be compared horizontally. However, this simple comparison may be seriously misleading. The reason is that the underlying architecture of different blockchains will profoundly affect the actual impact of token issuance on the market.

The fundamental difference between proof of work (PoW) and proof of stake (PoS) is particularly evident in the inflation effect. Due to the huge difference in operating costs, the same inflation rate may produce completely different market effects under these two consensus mechanisms. More importantly, in the PoS system, we also need to take into account the changes in the pledge rate.

Let's analyze the specific situation of the three major public chains in depth:

• Fixed issuance and halving mechanism

Bitcoin's inflation mechanism seems to be the simplest and most intuitive: a new block is generated every 10 minutes and halved every four years. From 50 BTC/block at the time of creation in 2009, it has now dropped to 3.125 BTC/block. Currently, about 164,000 BTC (about $10.3 billion) are produced each week.

• The impact of the high-cost operating model

However, behind this seemingly simple mechanism, there is a more complex economic reality. Due to the high cost of mining, these new supplies often translate into actual market selling pressure. Miners need to continue to sell Bitcoin to pay for electricity, equipment and operating costs, which are mainly denominated in fiat currency. The amount of Bitcoin miners' balances has remained flat

• Market pressure appears

Recent data is particularly noteworthy: Following the halving event in April 2024, the growth of Bitcoin network computing power has stagnated significantly. This phenomenon suggests an important trend: miners' profit margins may have been compressed to the limit. Under the current Bitcoin price and hardware cost conditions, expanding the scale of mining seems to have lost economic viability.

Some Bitcoin mining companies have begun to adopt strategic transformation and expand their business to other high-energy-consuming industries such as artificial intelligence. This transformation trend reflects the current operating pressure of the mining industry from the side. More importantly, the continued narrowing of profit margins means that miners may need to sell a higher proportion of mining income to maintain operations.

• Unique issuance mechanism design

As a native PoS public chain, Solana adopts a unique fixed inflation plan. The current annualized inflation rate is 5.1%, and it is planned to decrease at a rate of 15% per year until it reaches the final target value of 1.5% in 2031. This mechanism ensures the predictability of token supply while also providing continuous incentives for network security.

• Staking dynamic analysis

Solana's staking rate data is particularly eye-catching: since it first broke the 60% threshold in September 2021, the staking rate has remained at a high level and reached a historical high of 72% in October 2023. Although it has declined slightly since then, it has remained stable at 68% overall.

• Market Implications

This staking rate stability sends several important signals:

1. Validators' long-term confidence in the network

2. Staking income may have reached the market equilibrium level

3. Part of the staking income is flowing into the market in an orderly manner

It is particularly noteworthy that the upcoming SIMD0096 proposal will cancel the token destruction mechanism in the priority fee, which may have an impact on future supply dynamics. Currently, Solana's net issuance is about 528,000 SOL per week (equivalent to US$84 million).

• A fundamental shift from PoW to PoS

Ethereum's situation is the most special and complex. Since the completion of the "merger" to PoS in 2022, its inflation mechanism has undergone fundamental changes. Although the market is still accustomed to directly comparing the inflation rate of ETH with that of BTC, this comparison may be seriously misleading.

• Dual inflation adjustment mechanism

Ethereum uses two key mechanisms to adjust supply:

1. Token issuance based on total stake: issuance is proportional to the square root of the number of validators

2. Transaction fee destruction mechanism: implemented through the EIP1559 proposal, it may even lead to deflation during certain periods of high network activity

   Analysis of the staking effect

The most noteworthy thing is Ethereum's staking data: - The current staking volume has reached 33 million ETH, accounting for 28% of the total supply - Since January 2023, the new staking volume has reached 13 times the total issuance volume - Although the staking rate is lower than other PoS public chains, it shows a continuous growth trend

ETH's issuance is negligible relative to the growth of staking Source Dune and Coinbase These data show that the staking mechanism has actually become the most important liquidity contraction channel for ETH, and its influence far exceeds the token issuance or destruction mechanism.

Differentiated supply and demand dynamics

1. Bitcoin: Although the halving mechanism will reduce the supply, the continuous selling pressure from miners cannot be ignored. Especially in the current situation where computing power has peaked, the operating pressure of miners may turn into greater market selling pressure.

2. Solana: A stable high staking rate indicates that the network has reached a certain equilibrium state. But the upcoming protocol change (cancellation of part of the destruction mechanism) may affect this balance.

3. Ethereum: The continued growth of staking is creating a unique supply and demand dynamic. As long as the staking growth rate remains higher than the inflation rate, ETH is likely to maintain a relatively stable liquidity environment.

1. Difference in cost structure- The cost of holding coins for PoW chains (such as Bitcoin) is mainly reflected in continuous operating expenses- The stakers of PoS chains have stronger holding capacity due to low operating costs- This difference will affect the performance of different assets in the market cycle

2. Staking rate indicator- The analysis of PoS public chains must take into account the changes in the staking rate- The trend of changes in the staking rate may better reflect the actual market supply and demand situation than the inflation rate- Be wary of the potential market impact caused by sudden changes in the staking rate

3. Liquidity evaluation- The liquidity characteristics of different public chains vary significantly- When evaluating crypto assets, it is necessary to comprehensively consider the issuance mechanism, staking dynamics and market pressure- The inflation rate data needs to be understood in a specific economic model

In the investment analysis of crypto assets, we need to go beyond simple inflation rate comparisons and deeply understand the economic dynamics behind different issuance mechanisms. Only by comprehensively analyzing the token economics model, network participant behavior and market liquidity characteristics can we more accurately evaluate the investment value of various crypto assets.

In the current market environment, this in-depth analysis is particularly important. Bitcoin is about to be halved, Ethereum staking continues to grow, and Solana is facing mechanism adjustments. These changes may have a profound impact on the market. Investors need to establish a more comprehensive analytical framework to seize investment opportunities in this rapidly evolving market.

The other side of the token issuance mechanism: How inflation affects the liquidity of crypto assets

At the recent DevCon conference, Mike Nueder's speech "ETH is Permissionless Money" sparked widespread discussion. By comparing the inflation data of Bitcoin, Ethereum, and Solana, he revealed a question worth pondering: Are we oversimplifying the inflation problem of cryptocurrencies? Behind this question, there are profound revelations about the valuation and liquidity of crypto assets.

In the crypto market, inflation rate has always been one of the core indicators that investors pay attention to. People are accustomed to directly comparing the inflation rates of different tokens, as if it is a simple number that can be compared horizontally. However, this simple comparison may be seriously misleading. The reason is that the underlying architecture of different blockchains will profoundly affect the actual impact of token issuance on the market.

The fundamental difference between proof of work (PoW) and proof of stake (PoS) is particularly evident in the inflation effect. Due to the huge difference in operating costs, the same inflation rate may produce completely different market effects under these two consensus mechanisms. More importantly, in the PoS system, we also need to take into account the changes in the pledge rate.

Let's analyze the specific situation of the three major public chains in depth:

• Fixed issuance and halving mechanism

Bitcoin's inflation mechanism seems to be the simplest and most intuitive: a new block is generated every 10 minutes and halved every four years. From 50 BTC/block at the time of creation in 2009, it has now dropped to 3.125 BTC/block. Currently, about 164,000 BTC (about $10.3 billion) are produced each week.

• The impact of the high-cost operating model

However, behind this seemingly simple mechanism, there is a more complex economic reality. Due to the high cost of mining, these new supplies often translate into actual market selling pressure. Miners need to continue to sell Bitcoin to pay for electricity, equipment and operating costs, which are mainly denominated in fiat currency. The amount of Bitcoin miners' balances has remained flat

• Market pressure appears

Recent data is particularly noteworthy: Following the halving event in April 2024, the growth of Bitcoin network computing power has stagnated significantly. This phenomenon suggests an important trend: miners' profit margins may have been compressed to the limit. Under the current Bitcoin price and hardware cost conditions, expanding the scale of mining seems to have lost economic viability.

Some Bitcoin mining companies have begun to adopt strategic transformation and expand their business to other high-energy-consuming industries such as artificial intelligence. This transformation trend reflects the current operating pressure of the mining industry from the side. More importantly, the continued narrowing of profit margins means that miners may need to sell a higher proportion of mining income to maintain operations.

• Unique issuance mechanism design

As a native PoS public chain, Solana adopts a unique fixed inflation plan. The current annualized inflation rate is 5.1%, and it is planned to decrease at a rate of 15% per year until it reaches the final target value of 1.5% in 2031. This mechanism ensures the predictability of token supply while also providing continuous incentives for network security.

• Staking dynamic analysis

Solana's staking rate data is particularly eye-catching: since it first broke the 60% threshold in September 2021, the staking rate has remained at a high level and reached a historical high of 72% in October 2023. Although it has declined slightly since then, it has remained stable at 68% overall.

• Market Implications

This staking rate stability sends several important signals:

1. Validators' long-term confidence in the network

2. Staking income may have reached the market equilibrium level

3. Part of the staking income is flowing into the market in an orderly manner

It is particularly noteworthy that the upcoming SIMD0096 proposal will cancel the token destruction mechanism in the priority fee, which may have an impact on future supply dynamics. Currently, Solana's net issuance is about 528,000 SOL per week (equivalent to US$84 million).

• A fundamental shift from PoW to PoS

Ethereum's situation is the most special and complex. Since the completion of the "merger" to PoS in 2022, its inflation mechanism has undergone fundamental changes. Although the market is still accustomed to directly comparing the inflation rate of ETH with that of BTC, this comparison may be seriously misleading.

• Dual inflation adjustment mechanism

Ethereum uses two key mechanisms to adjust supply:

1. Token issuance based on total stake: issuance is proportional to the square root of the number of validators

2. Transaction fee destruction mechanism: implemented through the EIP1559 proposal, it may even lead to deflation during certain periods of high network activity

   Analysis of the staking effect

The most noteworthy thing is Ethereum's staking data: - The current staking volume has reached 33 million ETH, accounting for 28% of the total supply - Since January 2023, the new staking volume has reached 13 times the total issuance volume - Although the staking rate is lower than other PoS public chains, it shows a continuous growth trend

ETH's issuance is negligible relative to the growth of staking Source Dune and Coinbase These data show that the staking mechanism has actually become the most important liquidity contraction channel for ETH, and its influence far exceeds the token issuance or destruction mechanism.

Differentiated supply and demand dynamics

1. Bitcoin: Although the halving mechanism will reduce the supply, the continuous selling pressure from miners cannot be ignored. Especially in the current situation where computing power has peaked, the operating pressure of miners may turn into greater market selling pressure.

2. Solana: A stable high staking rate indicates that the network has reached a certain equilibrium state. But the upcoming protocol change (cancellation of part of the destruction mechanism) may affect this balance.

3. Ethereum: The continued growth of staking is creating a unique supply and demand dynamic. As long as the staking growth rate remains higher than the inflation rate, ETH is likely to maintain a relatively stable liquidity environment.

1. Difference in cost structure- The cost of holding coins for PoW chains (such as Bitcoin) is mainly reflected in continuous operating expenses- The stakers of PoS chains have stronger holding capacity due to low operating costs- This difference will affect the performance of different assets in the market cycle

2. Staking rate indicator- The analysis of PoS public chains must take into account the changes in the staking rate- The trend of changes in the staking rate may better reflect the actual market supply and demand situation than the inflation rate- Be wary of the potential market impact caused by sudden changes in the staking rate

3. Liquidity evaluation- The liquidity characteristics of different public chains vary significantly- When evaluating crypto assets, it is necessary to comprehensively consider the issuance mechanism, staking dynamics and market pressure- The inflation rate data needs to be understood in a specific economic model

In the investment analysis of crypto assets, we need to go beyond simple inflation rate comparisons and deeply understand the economic dynamics behind different issuance mechanisms. Only by comprehensively analyzing the token economics model, network participant behavior and market liquidity characteristics can we more accurately evaluate the investment value of various crypto assets.

In the current market environment, this in-depth analysis is particularly important. Bitcoin is about to be halved, Ethereum staking continues to grow, and Solana is facing mechanism adjustments. These changes may have a profound impact on the market. Investors need to establish a more comprehensive analytical framework to seize investment opportunities in this rapidly evolving market.