🫧 Dilute me

Brought to you by:

How do you measure frothiness in crypto?

Maybe it's the rate of new all-time highs. Maybe it's the way that there seem to be top signals everywhere, but there's an attitude that this time is different.

My theory: Crypto will be frothy until token inflation negatively impacts prices.

🐂 Bullish inflation

The “why are we here?” angle tends to feature prominently in advertisements from big companies in crypto. 

Coinbase in particular has relied on the motif that crypto is an escape hatch freeing folks from a financial system no longer serving us — we’re all trapped by inflation and a spiraling cost-of-living crisis, until we buy the right coins.

I’ve always found that framing of crypto rather messy. There are indeed parts of the onchain economy that are largely free of inflation: digital assets with anti-inflationary properties like bitcoin, ether and perhaps tokenized gold stablecoins. 

But most coins and tokens do not fit that description. The overwhelming majority of top assets have some kind of token-supply inflation, to the point that a quick analysis of top risk-based coins shows circulating supplies among the top 500 or so have increased by more than 100% during this bull market to date, and the median by about 40%.

Historically, it’s been a faux pas to liken coins to stocks in any sense for fear of appearing sympathetic to the SEC. I’m hoping that we all know better by now: Layer-1 native coins obviously have the strongest case to be treated as something similar to commodities, while coins where there is a more obvious link to a particular development studio, venture capital firm, or for-profit company might end up being seen as more similar to tokenized equity. 

No matter. Token issuers still sell their tokens to fund themselves, just as any publicly-traded company would sell their shares, and investors buy the tokens to gain exposure to their successes, just as they would any company’s stock.

There’s nothing wrong with any of this, and any startup, collective or non-profit, in the world should be able to freely raise capital on crypto rails, even if it means boosting circulating supplies by thousands of percent per year: internet capital markets for all. It’s also debatable whether increased token supplies should be considered “inflation.”

Coinbase’s latest ad honed in on life in the UK 

For the sake of argument, let’s just say that increases to token supplies are inflation. The best-performing coins for this bull market to date (starting in November 2022) — solana, raydium, fetch.ai — have supply inflation rates of about 50%, 70% and 220% across that period.

In each case, prices have multiplied while, technically, token holders have been considerably diluted. It’s just that there have been enough buyers and fresh capital to counteract that dilution, which right now, to me, is my working definition for “froth” in crypto moving forward.

It would be neatest to see a simple negative correlation between token-supply inflation and prices — higher inflation always means lower price appreciation — but there isn’t really. 

There is, however, some relationship between the worst performing coins, particularly ones that have fallen to the lower ends of the crypto market during this bull market, and their inflation. 

Osmosis’ token price has fallen by 50%, while its circulating supply has increased by two-thirds. chia is another, losing almost 20% from its price with inflation of more than 150%. Moonbeam, mina, enjin coin also. 

But perhaps their poor performance has to do with more factors than just supply. I have a feeling we simply won’t know until the depths of the next bear market (which is hopefully still far away!)

Brought to you by:

Katana was built by answering a core question: What if a chain contributed revenue back into the ecosystem to drive growth and yield?

We direct revenue back to DeFi participants for consistently higher yields.

Katana is pioneering concepts like Productive TVL (the portion of assets are actually doing work), Chain Owned Liquidity (permanent liquidity owned by Katana to maintain stability), and VaultBridge (putting bridged assets to work generating extra yield for active participants).

• Solana treasury company Forward Industries wants to raise an additional $4 billion by selling more shares.

• BNB has set a new all-time high of $962.08 after word that its DOJ surveillance pact might soon be over (BNB’s supply has shrunk by 13% this bull market).

• ICYMI: Blockworks Research’s Luke Leasure explores: Why would Base need a token?

It’s the summer of DATs and the party is going strong. 

But when October rolls around, everyone will be looking to DAS: London to hear from these meta-defining voices on where things stand and where they’re headed.

Get your ticket today with promo code: EMPIRENL

📅 October 13-15 | London