☕ Froth check

Brought to you by:

We’re coming at you today from Seoul, home of K-pop, kimchi and Korea Blockchain Week!

The jet lag is real — but next week, it’ll all be worth it.

Today we’ve got a takeover from the Empire newsletter’s David Canellis, exploring what “froth” and inflation looks like in crypto right now.

— Kate Irwin

Bullish inflation

The “why are we here?” angle tends to feature prominently in advertisements from big companies in crypto. 

Coinbase in particular has relied on the motif that crypto is an escape hatch freeing folks from a financial system no longer serving us — we’re all trapped by inflation and a spiraling cost-of-living crisis, until we buy the right coins.

I’ve always found the framing of crypto rather messy. There are indeed parts of the onchain economy that are largely free of inflation: digital assets with anti-inflationary properties like bitcoin, ether and perhaps tokenized gold stablecoins. 

But most coins and tokens do not fit that description. The overwhelming majority of top assets have some kind of token-supply inflation, to the point that a quick analysis of top risk-based coins shows circulating supplies among the top 500 or so have increased by more than 100% during this bull market to date, and the median by about 40%.

Historically, it’s been a faux pas to liken coins to stocks in any sense for fear of appearing sympathetic to the SEC. I’m hoping that we all know better by now: Layer-1 native coins obviously have the strongest case to be treated as something similar to commodities, while coins where there is a more obvious link to a particular development studio, venture capital firm, or for-profit company might end up being seen as more similar to tokenized equity. 

No matter. Token issuers still sell their tokens to fund themselves, just as any publicly-traded company would sell their shares, and investors buy the tokens to gain exposure to their successes, just as they would any company’s stock.

There’s nothing wrong with any of this, and any startup, collective or non-profit, in the world should be able to freely raise capital on crypto rails, even if it means boosting circulating supplies by thousands of percent per year: internet capital markets for all. It’s also debatable whether increased token supplies should be considered “inflation.”

For the sake of argument, let’s just say that increases to token supplies are inflation. The best-performing coins for this bull market to date (starting in November 2022) — solana, raydium, fetch.ai — have supply inflation rates of about 50%, 70% and 220% across that period.

In each case, prices have multiplied while, technically, token holders have been considerably diluted. It’s just that there have been enough buyers and fresh capital to counteract that dilution, which right now, to me, is my working definition for “froth” in crypto moving forward.

It would be neatest to see a simple negative correlation between token-supply inflation and prices — higher inflation always means lower price appreciation — but there isn’t really. 

There is, however, some relationship between the worst performing coins, particularly ones that have fallen to the lower ends of the crypto market during this bull market, and their inflation. 

Osmosis’ token price has fallen by 50%, while its circulating supply has increased by two-thirds. chia is another, losing almost 20% from its price with inflation of more than 150%. Moonbeam, mina, enjin coin also. 

But perhaps their poor performance has to do with more factors than just supply. I have a feeling we simply won’t know until the depths of the next bear market (which is hopefully still far away!)

— David Canellis 

Brought to you by:

Katana was built by answering a core question: What if a chain contributed revenue back into the ecosystem to drive growth and yield?

We direct revenue back to DeFi participants for consistently higher yields.

Katana is pioneering concepts like Productive TVL (the portion of assets are actually doing work), Chain Owned Liquidity (permanent liquidity owned by Katana to maintain stability), and VaultBridge (putting bridged assets to work generating extra yield for active participants).

The convergence of AI, crypto, and capital is turning IP into the next real-world asset class, and the race to unlock it has already begun.

Join Story and Blockworks at Origin Summit, where this new market takes shape.

Use promo code: BWNL50 for 50% off your ticket.