Ethereum as a deflationary asset, explained
Centralized regulatory organizations typically govern the inflation of asset prices in traditional capital markets. Is that the same in Web3? Who ensures fair play?
In the United States, the Federal Reserve (the Fed) assumes the responsibility of maintaining inflation at reasonable levels by implementing tools such as altering interest rates, bond-buying programs and money printing. This obligation is typically similar across most other nations. In Web3, inflation is controlled by the protocol’s monetary policy, which is determined by the community through decentralized governance.
Deflationary mechanisms are interwoven into the tokenomics while creating the ecosystem. Where tokens have an unlimited supply, as the token ecosystem matures, there would be more opportunities for burn. Therefore, the organization managing the token must proactively identify these opportunities and embed them into the tokenomics to reduce the supply.
The Ethereum Merge is a fine example of how the Ethereum supply and demand was tweaked to make it deflationary. Such significant tokenomics changes are typically proposed, approved and executed by a decentralized autonomous organization (DAO) that governs the token and the platform behind it.
These tokenomics changes are then embedded into smart contracts as the rules of the ecosystem. Smart contracts drive the new business rules and the economic model of the ecosystem. As a result, DAOs could play a significant role in ensuring efficient and effective governance of the tokens.
Since decentralization is one of the tenets of the blockchain world, an economic system not controlled by the founding teams, investors, venture capitalists and whales is crucial to delivering sustainable tokenomics based on sound business models.