Protocol Inflation

Protocol inflation refers to the growth of the total token supply resulting from reward distributions. While necessary to bootstrap early networks, it creates sell pressure as participants sell rewards for profit.

High inflation can be detrimental if not offset by demand-side growth or deflationary mechanisms. It is the primary counterweight to deflationary designs.

Analysts must calculate the net inflation rate to understand the true economic impact on token holders. Controlling inflation is a delicate balancing act between attracting new users and preserving the value of existing tokens.