Supply Side Inflation

Supply side inflation refers to the increase in the total amount of an asset available in the market due to protocol-level supply expansion. Unlike demand-driven inflation, which results from rising costs of goods, this is a purely monetary phenomenon driven by the software rules of the blockchain.

When a protocol generates new tokens to pay validators or incentivize users, it increases the total supply, which can lead to devaluation if the market cap remains stagnant. This is a primary concern for long-term investors who fear that their percentage of network ownership will shrink over time.

Understanding supply side inflation is vital for calculating the real yield of an asset after accounting for dilution. It is the direct mechanism behind inflationary dilution risks.