Is Cardano Deflationary? The Tokenomics Of ADA

ADA, the native cryptocurrency of the Cardano blockchain, is an exciting crypto with a strong following. In this article, I’ll look into the economics of this token and figure out if Cardano is deflationary. It will contain a lot of numbers and charts, I hope you enjoy it!

Cardano is not deflationary, but it will be in 2030 and beyond. At the moment, the inflation rate is 5.7%. However, the inflation rate decreases exponentially over time and will be 0.9% per year in 2030. Assuming 1% of the supply is lost per year due to human error, Cardano will be deflationary.

Let us get deeper into the economics of ADA and figure out how the supply will change in the future.

First of all, Cardano has a circulating supply of 32 Billion ADA and a max supply of 45 Billion. That’s roughly 2000x the supply of Bitcoin, and the main reason behind the low price of ADA compared to other coins like Bitcoin and Ethereum.

To illustrate, I made this chart showing the difference in supply between a few coins:

data source: CoinMarketCap

Notice how the coins with high supply are priced low. For example, Doge, XRP, and ADA are priced relatively low, while ETH is priced in the thousands of dollars.

This is why Cardano will never reach $1000.

The reason is this: Price per token = Market Capitalization / Circulating Supply.

From this equation, we see that a high supply leads to a low price. Also, if the supply increases, the price decreases. This is called inflation. If the supply decreases, the price increases – called deflation.

About 71% of the coins are in circulation, while the rest is waiting to be released.

The way the remaining 29% is released will decide the inflation/deflation mechanics of Cardano.

Let’s get into the details, and try to figure out how the inflation/deflation will change over time:

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The Dynamic Inflation Rate of Cardano

In this section, we will do some good ol’ math to estimate the true inflation rate of ADA. Is it actually 7% per year? Let’s check it out.

For simplicity, I’ll define “inflation rate” like this:

Number of coins taken from the locket supply into the circulating supply (including treasury), as a percentage of the number of coins already in the circulating supply, per year.”

It’s also helpful to distinguish between absolute and relative inflation: Absolute inflation is the number of coins added to the circulating supply every year, while relative inflation is the percentage these new coins make out of the total circulating supply.

We’re trying to figure out the number of coins taken from the reserves per year and calculate the ratio between that number and the circulating supply.

The Long Term Inflation/Deflation Of Cardano (ADA):

The absolute inflation of Cardano depends on 2 things:

  1. The percentage of the circulating supply that is currently staked
  2. The number of coins in the reserve

Here are the rules governing the inflation rate, simplified a bit of course:

  1. At any time, nor more than 0.3% of the reserve ADA will be released every Epoch (5 days)
  2. The released ADA is equal til 0.3% muliplied by the percentage of the circulated supply of ADA being staked.

About 70% of the circulating ADA is currently being staked (source), and the reserve holds about 13 Billion ADA (source).

This gives us everything we need to calculate the absolute inflation rate:

0.3% * 0.7 * 13 Billion ADA = 27 300 000 ADA Every Epoch (5 days)

After messing around with the numbers in Excel, I made a chart showing the absolute inflation together with the total number of ADA added to the circulating supply x years after 2020:

Is Cardano deflationary?

Notice: The secondary y-axis (the right vertical axis) is logarithmic! Every tick up/down is 10x.

This is what we can learn from the chart:

  • Given the rules above, the reserve will never be empty, and there will technically always be some inflation. However, inflation is converging to zero at an exponential rate (slower and slower).

  • At some point, people will lose more ADA in faulty transactions, forgetting private keys, etc., than the absolute inflation is adding ADA to the supply, effectively making Cardano deflationary.

  • The long-term value of ADA will probably be more stable after the high inflation in the first decade. Likely, it will increase in value over time as it becomes more scarce/hard to make/earn.

To get the inflation in relative terms, i.e., as a percent of the circulating supply, I’ve made this chart showing how it evolves for the next 30 years:

Cardano inflation rate long term

It starts at 5.71%. After five years it’s 2.61%. After a decade, it’s 1.1%. After 30 years, the inflation is 0.05%.

This looks similar to the inflation rate of Bitcoin, where it is halved every four years, exponentially decreasing inflation.

Read more about how the halving of Bitcoin affects the price of Bitcoin here to learn how important inflation actually is.

Suggested reading: Why is Algorand so cheap?

Conclusion: No Cardano Is Not Deflationary, But It Will Be In The Future

There’s currently an inflation rate of 5.71% per year, but it’s decreasing exponentially. It is reasonable to assume that 1% of the supply is lost due to human error every year, which gives us deflation after 10 years, according to the charts above.

In other words:

Cardano is not deflationary yet. At the moment, the supply inflates at a rate of 5.7 percent per year. However, the inflation rate decreases exponentially over time and will be less than 1% per year in 10 years. Assuming 1% of the supply is lost per year due to human error, Cardano will be deflationary in 2030 and beyond.

Read this article to learn more about the fees of Cardano and how they fluctuate.

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