Inflation is not a new concept and, in the world of traditional finance, continued pressure on the economy saw the US printed more money in one month than in two centuries last year. Inflation is also not new in the cryptocurrency and DeFi realms, with the mechanics propping-up today’s decentralized economies often relying on token inflation to reward token holders and early adopters.
Utilising tokens as a tool, the vast majority of DeFi protocols offer a range of incentives including staking and liquidity provision rewards to encourage participation and support. Outside of DeFi, inflation is again used largely to incentivize network participants to be a part of the decentralized mechanisms that keep platforms running and token economies functioning.
Too Much Air?
Although inflation is undoubtedly an effective strategy that works for some of the world’s strongest blockchain networks (Bitcoin being one of them), many of today’s DeFi and blockchain projects rely too heavily on this model for incentivization. Over-inflationary reward mechanisms inevitably lead to a gradual increase of the tokens circulating supply, increased prices and a reduction of purchasing power.
In worst-case scenarios, badly designed inflation models have the complete collapse of projects, with the token numbers rocketing but the token itself becoming all but worthless in a scenario that benefits neither the development of the project nor the token holders. The rapid growth of DeFi protocols has seen countless projects experimenting with hyperinflationary token models that end up imploding due to the combination of low demand and high inflation rates.
Recreation of Inflation
DAFI looks to change the way that the blockchain space utilizes inflation, by enabling web3 and DeFi protocols to reward participants and early adopters with synthetic versions of their tokens as rewards. With an elastic, intermediary synthetic unit that is synthesized, DAFI recreates inflation without creating excessive supply.
This exciting new alternative to hyperinflation has applications across both blockchains and DeFi platforms and, by giving protocols the power to distribute rewards to network participants and early adopters in a manner that does not entail excessive token supply, both the platform and the user can benefit from a healthier and more sustainable incentive model.
Win-win for Future DeFi Economies
With the DeFi space still in its infancy, periods of volatility in the market such as back in October 2020 saw many DeFi projects damaged when investors decide to lock in profits. By creating demand-pegged inflation, projects integrating with the DAFI protocol can stop relying on over-inflation and avoid unrecoverable damage to their token valuations during bearish market periods.
For those looking to genuinely support the growth of decentralized protocols and their ecosystems, DAFI is a welcome alternative to shaky and unsustainable incentive models currently on the market. With an MVP already available and having last year been recognized by banking firm NatWest in the company’s monthly newsletter, DAFI looks to ramp up activities this year with milestones including the launch of DAFI.Finance in Q2.
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