Cryptocurrency inflation is a major concern for many investors, especially those playing the long game, yet the concept is often poorly understood.
If the total supply of a given token is increasing, it can be called inflationary. Meanwhile, deflationary coins are those with a shrinking supply. However, these basic definitions are complicated by the fact that cryptocurrencies with a fixed maximum supply like Bitcoin are often referred to as deflationary, even though mining or staking rewards tend to increase their total supply.
This article delves into the inflation rates of the top 5 highest market capitalization cryptocurrencies.
The original cryptocurrency is “deflationary” in the sense that its maximum supply is capped at 21M coins. However, although over 93% of all coins have already been mined, producing the next 1.4M BTC will take a long time – around 117 years according to the current block schedule.
Bitcoin inflation is determined by how much miners are awarded for each block. From an initial rate of 50 BTC per block, the reward rate is programmed to halve every 4 years. After 3 such halving events, miners currently earn 6.25 BTC per block, but rewards are expected to be cut by 50% again in April 2024.
Were it a purely mathematical model, Bitcoin inflation would remain consistent between halving events. The reality is less tidy, however.
Although bound by the Bitcoin protocol to generate a new block every 10 minutes, the globally distributed network of miners is also constrained by physics. Over the course of a month, small fluctuations in the time it takes to generate each block add up. As such, the monthly BTC inflation rate has fluctuated between 1.4% and 1.9% since the last halving.
While the total Bitcoin supply is set to keep increasing until the year 2140, because of the different way Ethereum issues new coins, changes to the ETH supply are more dynamic.
Rather than a fixed reward rate, Ethereum’s overall issuance of new tokens is determined by how many validators there are. However, the additional supply created by validator rewards isn’t the only factor determining the ETH inflation rate. Gas fees also play a role.
Unlike Bitcoin transaction fees, which are returned to miners as an additional source of BTC alongside block rewards, Ethereum burns a portion of all gas fees, permanently removing ETH from circulation.
Because it has an in-built mechanism for reducing the total supply of tokens, Ethereum inflation fell dramatically after the network transitioned to PoS, when the issuance of new coins fell from around 5.4M ETH to 500,000 ETH per year.
In fact, throughout the spring and early summer of 2023, the cryptocurrency was properly deflationary, with monthly inflation falling as low as -1% at one point.
Although it has risen since then, Ethereum’s inflation rate remains far lower than Bitcoin’s, rarely breaking above 1% in recent months.
Borrowing many elements of Ethereum’s design, BNB chain operates a variation of PoS.
While BNB has a dynamic supply, it was designed to be deflationary from the outset. With significantly fewer validators than Ethereum (32 versus over a million ), BNB generates staking rewards from transaction fees alone.
To reduce the total supply over time, the blockchain has an in-built quarterly token-burning mechanism. Every 3 months, a portion of BNB is permanently destroyed. This process is expected to continue until the total supply reaches 100M.
During the most recent quarterly burn, the network’s 25th, around 2.1M BNB was removed from circulation. As a result of the burn, the circulating supply of BNB declined by 1.38% in Q3, 2023, representing a monthly inflation rate of around -1.16% and continuing the deflationary trend of previous quarters.
Unlike most cryptocurrency networks, the XRP Ledger (XRPL) doesn’t reward validators, relying on a consensus mechanism known as Proof-of-Association (PoA) rather than the PoW or PoS systems used by Bitcoin Ethereum and BNB.
A unique feature of PoA is that all of the 100B XRP in existence were minted at the point of genesis and there is no way to generate more.
Because XRPL doesn’t need to pay validators for their work, 100% of transaction fees are burned. Although the XRPL burn rate creates deflationary pressure, its effect is outweighed by a stream of 1B vested XRP released to Ripple each month.
Between the second and third quarter of 2023, the release of XRP to Ripple increased the token’s circulating supply by 8.6%. This translates to a monthly inflation rate of 1.94%.
Were the monthly XRP unlocks the only factor determining XRP inflation, it would be easy to predict. However, the net increase in circulating XRP is often less than 1B.
Having initially placed 55B XRP into a cryptographically secured escrow account in 2017, the monthly unlocking schedule should have released the entire XRP supply. However, Ripple has historically returned a portion of the vested tokens it receives back into escrow.
While this has helped tamp inflation, it also delayed the day when XRP becomes properly deflationary. At present, Ripple’s vested XRP still accounts for around 40% of the token’s total supply and it could be many years before the full 100B coins circulate freely.
In contrast with the other 4 coins on this list, Solana wasn’t necessarily intended to reach a deflationary state. Instead, it started with an annual inflation rate of 8% (1.9% monthly) which reduces by 15% each year.
The tapering mechanism will then stabilize once inflation has fallen to 1.5% (1.034% monthly), where it is expected to remain fixed. Solana’s current monthly rate of inflation is 1.156%.
As with other PoS cryptocurrencies, SOL holders can mitigate the effects of inflation by staking. As long as less than 100% of the token’s total supply is staked, the rate of return from staking yields is guaranteed to be higher than the rate of inflation. This prevents the issuance of new SOL from diluting existing stakers’ share of the total supply. (Provided they aren’t getting ripped off by third-party validator operators.)