Hello, I would like to know the Cardano Foundation / IOHK’s rationale for choosing a cap on the supply of ADA (45 billion specifically but this number is arbitrary). As we know, a hard cap on the quantity of a token causes a deflationary effect in the value of that currency, assuming that more value is in invested in it with time. We expect this to happen as Cardano grows in its adoption. And this is a bad thing.
FYI if you are not sure what I’m talking about, here is my understanding: a digital asset’s market capitalisation represents the total amount of money ‘invested’ into it by purchasers of that asset. As more people join the ecosystem, or choose to swap fiat currency for ADA, prospective investors are willing to pay slightly more to take the ADA from another individual who values it less. This is market trading. Eventually the asset accumulates into the hands of those people who value it most, and the asset’s unit price settles around a stable value of ~ (market cap / quantity in circulation).
A good currency holds a stable value. It doesn’t inflate or deflate. (I won’t get into an argument about the economics; that is not what this post is about.) Fixing the supply of a currency results in a stable currency value assuming that the market capitalisation reaches a stable value. When value is added to a traditional economy (e.g. a country increases its GDP), more currency is injected to reflect the added value, and this prevents unwanted deflation.
I am concerned that Cardano’s vision seems to turn a blind eye to this fundamental economic principle. The supply of ADA is fixed, so that as market capitalisation grows with new investments, new projects, new adoption, growing world economies, growing population, etc then the value of individual ADA will increase (as per equation = market cap / 45,000,000,000).
As I said, I believe a currency that is fated to inflate or deflate is a strictly bad thing. I do not care if ‘stonks go up’ with a deflationary currency. I am concerned about the long-term health of the network, not so much in making a personal profit. A stable economy requires stable valuation, with new coins minted as value is added to the network, and coins removed as necessary if value decreases. I would just like to know what the Cardano Foundation / IOHK’s rationale is for implementing a coin cap, because it seems to me like a deliberate decision to make the currency deflationary.
And yes I am aware that Bitcoin’s supply is fixed. And that Ethereum’s isn’t. Please keep responses in scope, I really just want to know what Cardano’s rationale is for choosing to implement a coin cap.