Typical Token Release Schedule

Token Supply 101: Fundamentals of token supply — and monetary policy

Definitions

Token supply means a given number of tokens. However, token supply comes in different flavours:

  • Initial Token Supply: number of tokens in circulation when tokens start to be traded on the secondary market (crypto exchanges — i.e. Binance).
  • Current Token Supply: number of tokens in circulation at moment “t”.
  • Total Token Supply: that number is fixed, it is the total number of tokens that have been (or will be) created. This number is decided before the first coin is ever created.
  • Unlimited Supply: stands for Unlimited Total Token Supply. Term used when the total token supply is not fixed (e.g. Ethereum).
  • Maximum Token Supply: Total Token Supply minus Burnt Tokens.
    Burnt tokens are tokens that have been voluntarily sent to a wallet that no-one has access to (a.k.a. no one has the private key): tokens are virtually “destroyed”. Of course, this number is undefined in the case of tokens with unlimited supply.
  • Minted Tokens: tokens that have been created so far. That is it, much like “real money,” some projects decide to create more tokens over time. The general tendency is to have a fixed amount though: i.e. mint/create all the tokens for the ICO. In the old days, this used to be called “pre-mined” because all tokens are already created at the beginning and don’t need to be created at a later time.

Minting tokens does not mean they are in circulation, some of the tokens created can stay locked (out of circulation) for decades.

The above terms are foundations of the token economy. If you do not understand any of the terms, I invite you to re-read the definition given above or do some research until you get it.

Token Supply Relativity 101

Before moving to the topic of monetary policy, I’d like to get you to understand this:

The absolute number of tokens created, or held by any party, or in circulation, isn’t so important.

Let me explain: what matters most is the relative number of tokens created, or held by any party, or in circulation, or burnt, etc.

Janet Allen, Chair of the Board of Governors of the Federal Reserve System in a Bitcoin advertisement

Monetary policy 101

You have probably heard of monetary policy in the past. Inflation, deflation, inflationary policies, or even about “quantitative easing.

Reducing the price of a currency is what we call “inflationary policy”.

Inversely, if a country decides the price is too low, a simple way to make it gain value is to reduce the amount in circulation: destroy/burn money. (hey that news, never heard of countries doing such thing, crypto projects do do that though!).

Raising the price of a currency is what we call “deflationary policy”.

Why use inflationary or deflationary policies!?

When having an inflationary policy: you create more of a given currency so that those who want to buy it have more access to it (it creates abundance). So its price decreases because it is more available and less scarce. Value is scarce, remember that.

What does tall of this have to do with cryptocurrencies?

In crypto, the exact same thing happens. If a project decides to put an additional amount of token in circulation (remember, only the relative amount matters), it creates abundance, hence inflation. Hence the token price decreases.

What about Bitcoin?

Bitcoin has a total token supply fixed to 21 million. But it has so far created ‘only’ a bit over 17 million tokens (82.23% of the total supply). Bitcoin currently (in 2018) has an inflationary policy (regularly creating new coins) of circa 4% per year. In mid 2020, Bitcoin inflation rate will switch to around 1.80% (the famous ‘halving’ of the inflationary rate).

Currently, Bitcoin inflation rate is ~4%, it will switch to ~1.80% in mid 2020

What about Ethereum?

Ethereum does not have a fixed token supply: yes, it has an unlimited token supply. On top of that, Ethereum has a very high inflationary policy so far. In 2017, Ethereum inflation rate was 14.75%.

In 2017, Ethereum inflation rate was 14.75%

What about Altcoins?

Altcoins have very different monetary policies from one to another. This depends on the experience of the team, the advice they get & the opinions/theories these decision takers have/believe-in.

So what now?

So I hope that you now understand why token supply design IS monetary policy.

The token supply design IS monetary policy

On our end, we will surely come across the “token supply” topic in further articles & most probably dive deeper into it in dedicated articles.

Staying In Touch

Join the Crypto Kitchen TG announcement channel (ran by myself).

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Adrien Be.

Founder @ Web3 Family. Prev. DoinGud, aleph.im, ixo network, Ten8VC, GenesisDAO, FestDAO, PolkaDAO