Monetary Dilution

Monetary dilution occurs when the total number of outstanding tokens increases, thereby reducing the proportional ownership and claim on value for existing holders. This is common in protocols that mint new tokens to reward developers, early investors, or participants in yield farming.

From a quantitative perspective, if the market capitalization remains constant while the supply increases, the price per token must decline. This mechanism is often used to bootstrap new networks, but it poses a significant risk to passive investors if the dilution rate is not sustainable.

It is a primary driver of value transfer from the community to protocol stakeholders. Dilution analysis is a core component of evaluating the fundamental health of a digital asset.