Inflation. A lot can be said about this. It is a very important metric no doubt about that.
Grinding numbers on the Hive blockchain for a long time now, and one can start to apricate the meaning of inflation.
In the crypto world inflation refers to the amount of new coins that are put in circulation. The method how these coins are distributed can be different but in most of the cases the new coins are distributed to miners (PoW) or stake holders (PoS/DPoS).
Hive is interesting one, since it distributes the new coins based on the Proof of Brain mechanism (PoB). Although it also distributes it to the stake holders trough curation and staking rewards so it’s a bit of hybrid, DPoS/PoB.
For comparison and reference first let’s take a look at the inflation rate for some of the top cryptocurrencies:
- Bitcoin 1.8%
- Ethereum 4.5%
- Ripple, not fixed, escrow releases (6% to 8% historical)
- Litecoin 5%
- Cardano 5%
- EOS 5%
- Tezoz 5.5%
- Binance, negative inflation -2.35%
- Monero 2.86%
- Hive ~8%
The formula for calculating HIVE inflation:
Hive inflation = (978 - (head_block_number / 250000)) / 100 = (978 – (45,550,382/250000))/100
Hive inflation = 7.96%
Note that because of the double currency system HIVE/HBD, the inflation is also dependent from the price. When HIVE drops bellow 0.2 and conversion are made from HBD to HIVE, more HIVE is put in circulation increasing the inflation
At first look it seems that the inflation for the top coins is around 5%, while HIVE is above that with its 8%.
How about going forward? What is the projected inflation?
Here is a table announced way back in 2017.
| Year | Supply | Inflation | New supply |
|---|---|---|---|
| 2016 | 250,000,000 | 9.50% | 23,750,000 |
| 2017 | 273,750,000 | 9.00% | 24,637,500 |
| 2018 | 298,387,500 | 8.50% | 25,362,938 |
| 2019 | 323,750,438 | 8.00% | 25,900,035 |
| 2020 | 349,650,473 | 7.50% | 26,223,785 |
| 2021 | 375,874,258 | 7.00% | 26,311,198 |
| 2022 | 402,185,456 | 6.50% | 26,142,055 |
| 2023 | 428,327,511 | 6.00% | 25,699,651 |
| 2024 | 454,027,161 | 5.50% | 24,971,494 |
| 2025 | 478,998,655 | 5.00% | 23,949,933 |
| 2026 | 502,948,588 | 4.50% | 22,632,686 |
| 2027 | 525,581,274 | 4.00% | 21,023,251 |
| 2028 | 546,604,525 | 3.50% | 19,131,158 |
| 2029 | 565,735,684 | 3.00% | 16,972,071 |
| 2030 | 582,707,754 | 2.50% | 14,567,694 |
| 2031 | 597,275,448 | 2.00% | 11,945,509 |
| 2032 | 609,220,957 | 1.50% | 9,138,314 |
| 2033 | 618,359,271 | 1.00% | 6,183,593 |
| 2034 | 624,542,864 | 1.00% | 6,245,429 |
| 2035 | 630,788,293 | 1.00% | 6,307,883 |
Because of the HBD to HIVE conversions we can notice that in 2020 we already have more HIVE than the projected ~350M.
The current supply is around 364M, meaning 14M more HIVE have been put in circulation. This is because of the low HIVE prices and HBD to HIVE conversion. This is quite contra intuitive since you want to constrain the supply when the prices are down, not creating extra supply.
But it is what it is and because of these extra 14M HIVE, the actual HIVE inflation in the last years has been more than 10%, going from 250M to 364M HIVE in less than 5 years.
Interesting but 2020 looks like the year with the highest HIVE inflation in absolute numbers. The inflation is set to reduce to a 1% by 2033 and stay at 1%. In absolute numbers the new HIVE created per year will go down from 26M this year, and the few after to around 6M in 2033, or in 14 years.
This, if price hold and no extra HIVE is created from the conversion HBD to HIVE, that would most likely not happen. Meaning the projected inflation will be higher than the numbers above.
Is HIVE Inflation to high?
From the numbers above we can conclude that the overall inflation in the last years has been around 10%. The projected numbers are that inflation should reduce to 1%, but the decrease in the overall HIVE put in circulation should start somewhere around 2025, when the inflation should hit around 5%.
By that time, more HIVE will be generated from the HBD to HIVE conversions and we are looking maybe at 8% average inflation in the next 5 years. This is just a rough estimation. So, 5 years behind us with 10% inflation and 5 more to come with average 8% inflation, after which the inflation should be around the 5% mark that seems to be standard for a lot of cryptocurrencies.
By 2025 the calculated supply is around 480M, but we have seen that is more than that and if we project the average 8% in the next years that will be somewhere around 540M HIVE. From the todays 364M this is 180M more HIVE put in circulation or almost 50% increase in supply.
When we look at the numbers in this perspective they do look like a lot.
What can offset inflation?
Growth!
Yes, growth can offset inflation with ease. Doubling the numbers of users on HIVE and this inflation will means nothing. Doubling the number of users also should not be as hard having in mind the low numbers that we have now, comparing to the mainstream social media. The space for growth is massive. This inflation is meaningless compared to the potential. This is if we look at it from this perspective.
Also, as we have seen from the past, in the crypto world sometimes the fundamentals don’t matter much. Like when the price was up, was there some fundamental change in the tokenomics. No. Also HIVE seems to be following the general crypto trend and Bitcoin. Interesting enough the BTC cycles are connected with the BTC halving that is inflation metric.
A soft conclusion here is that growth can offset inflation easily, but reduced inflation can also create growth. These two things are connected.
Another extremely important metric (probably the most important one) for a healthy price is creating a buy pressure. Reducing supply without creating a buy pressure for a token means close to nothing. If none is interested in buying the token, supply don’t matter much.
If we agree that reducing the HIVE inflation might be a good step going forward, how we will do it?
Reminder of the Hive inflation distribution:
- Authors 32.5%
- Curators 32.5%
- HP holders 15%
- Witnesses 10%
- DAO/DHF 10%
What will be the best way to reduce the HIVE inflation?
Making a general cut in the inflation and leave the distribution for each of the categories the same?
This will be a fair principle.
But let me point out some possible scenarios.
1. The DAO/DHF fund
Not to be taken in a wrong manner I do support the DAO/DHF and all the work that is funded trough this fund at the moment. Especially now when there is no central entity. But the thing is there is around 83 million HIVE in the DAO account and around 500k HBD.
The 83M came from the Steemit Inc accounts, that the community saw as a development fund. Well now they truly are in the development fund. Not all of these 83M are dev fund, as some of it will be returned to users. Not sure what will be the total amount but I guess it will not be more than 1M.
In the upcoming HardFork this 83M, (minus some user funds), will be put in a long 5 year conversion to HBD and made accessible for the dev fund. If we take a conservative scenario of 1 to 4 HBD to HIVE, it means around 20M HBD at the end of the 5 year period. If we take 1 to 2 scenario (HIVE at 0.5$) the fund will end up with 40M HBD.
Currently the DAO/DHF receives around 5k HBD per day, or 1.8M per year. At the moment half of this funds are being used, or just above 2k per day or around 730k HBD per year. This number can vary dependent on the projects funded and lets round it up to a 1M HBD per year.
What this tell us that with a 1M HBD per year, and with conservative scenario for the HIVE to HBD conversion in the DHF fund, we will end up with 20M HBD fund, or 20 years of development fund. A possibility for 40 years as well.
20 years Hive development funds secured :)
With more than 20 years DHF fund secured, I think it is safe to cut the inflation for the DHF fund to zero, or maybe some very small symbolic amount lets say 1% to keep the system working. If after 20 years more funds are needed, we can increase this.
Cutting of the development fund inflation (not just relocating it) will reduce the HIVE inflation for 10%. From the 8% average projected for the next 5 years to 7.2%. Not much, but it is something.
This post is getting long and there is more to explore, and I will end up here.
In the next part we will explore the author/curators share of the inflation and more about creating buy pressure for the token.
All the best
@dalz