Inflationary Dilution

Inflationary dilution happens when the supply of a cryptocurrency increases through protocol-mandated rewards, reducing the proportional ownership of existing token holders. If a user does not stake their tokens to earn these new emissions, their relative share of the total network value decreases over time.

This creates an economic imperative for holders to participate in staking just to maintain their current market position. In the context of tokenomics, it acts as a tax on non-participating capital.

The protocol uses this mechanism to fund security, but if the issuance rate exceeds the growth in network utility, it can lead to long-term price depreciation. Effectively, it forces a trade-off between liquidity and value preservation.