Inflationary Token Dilution

Inflationary Token Dilution occurs when the total supply of a token increases, thereby reducing the ownership percentage and potential value of existing tokens. This is common in protocols that use inflation to pay for security or development.

When new tokens are minted, the value of each individual token is effectively diluted unless the market capitalization of the protocol grows at an equal or faster rate. If the supply growth is not met with proportional demand growth, the price per token will inevitably fall.

Investors must carefully monitor the inflation schedule of a project to ensure their holdings are not being excessively diluted over time. This is a critical risk factor in the fundamental analysis of any token with an uncapped or high-inflation supply model.