Steemit Crypto Academy Contest / S9W3 - STEEM Inflation

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Hello my friends,

It's nice to welcome you all to the third week of the season 9 steemit crypto academy engagement challenge.

This week, we will be focusing on Steem inflation.

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Use your own words to explain the concept of inflation in general and does it affect cryptocurrencies?

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The concept, Inflation is a common concept which explains the degree of economic depreciation mostly as a result of currency devaluation or high cost of living. It can also be simply regarded as the rate of currency depreciation or the rate at which the price of various goods and services increases over time.

Inflation as a general term can be caused by several factors which include, over printing of currency, lack of exportation of goods, etc.

Over printing of currency is one of the major causes of inflation as if often leads to too much currency supply thus hindering scarcity.

Lack of exportation is also a major cause of inflation as it hinders a currency from gaining attention in the foreign exchange market. When there is no demand for a currency in the foreign we exchange market, the currency ends up being a mere domestic currency with minimal value.

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• Inflation in cryptocurrency

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Inflation also affects cryptocurrencies for the fact that they are also a currency used in day to day transactions.

Inflation in cryptocurrency is mostly caused as a result of high supply and low demand. This imbalance causes a drop in value of that particular cryptocurrency.

The rate at which a cryptocurrency currency depreciates (inflation) can be caused by a constant increase in supply. Most cryptocurrencies often increases in supply over time and if there's no equal demand, inflation becomes inevitable.

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Explain the difference between deflationary and inflationary cryptocurrencies? And clarify what is the strategy followed by the Steem token and show how it works?

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Deflationary cryptocurrencies are cryptocurrencies whose supply is designed to reduce/deflate as time goes on.

This happens to induce scarcity thereby causing an increase in value of time. Most deflationary cryptocurrencies usually achieve this supply reduction by setting up a fixed annual percentage burn or by burning all transaction fees as they come.

A good example of such cryptocurrency is BNB which has a fixed percentage that is quarterly burn in other to reduce supply and induce scarcity.

_source

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Inflationary cryptocurrencies on the other hand are those cryptocurrency whose supply inflate/increases over time.

This is often as a result of mining, block rewards, or minting of these cryptocurrencies through adding value to the blockchain. The value might be that of security whereby users stake their tokens and earn incentives on the blockchain. It can also be intellectual value as seen on steemit which is a platform built on the Steem Blockchain.

Inflationary cryptocurrencies also has means of controlling the ever increasing supply of new currencies and this can be through halving as seen on Bitcoin, Litecoin and some other inflationary cryptocurrencies. It can also be through manual burning by transferring a particular amount to an unaccessible wallet as seen on Steem.

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• Steem strategy

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The Steem coin is an inflationary cryptocurrency meaning that it's supply is constantly on increase due to the constant reward the Blockchain users earn when they add value to the Blockchain either through their valuable contents, or by making the platform more secure through staking their earned Steem.

Steem being an inflationary cryptocurrency has set up means to control the supply and one of these methods is by initiating club status. This club status discourages users from withdrawing all they earn from the Blockchain platform (steemit). This lack of total withdrawal creates a kind of creates and equilibrium between demand and supply of Steem.

Another strategy is the burn Steem initiative which is also introduced on the steemit platform. This initiative encourages the transfer of a certain percentage of earned Steem into an unaccessible wallet. This helps to reduce the circulating supply of Steem.

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Calculate the Current Inflation Rate (the day of preparation for publicztion

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To calculate the inflation rate of Steem, we will have to make use of the formula, as seen in this post

         Inflation rate = 978 - (headblock number/250000)/100

To calculate the inflation rate, we have to get the value of the current headblock number by visiting the steemworld.org

Inflation rate= 978 - (74,268,072/250000)/100

=978 - 297.07/100

Inflation rate = 6.8%

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By tracking the rate of inflation for the next few years, interpret how easy or difficult it will be to earn STEEM rewards, and would that push you to build your SP right now?

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The inflation rate for the next few years will determine if there will be a reduction in Steem reward or an increase. If there's a reduction then, it's best to build so right now but if there's an increase, building sp in the future will be much easier.

So let's calculate to check if there will be a reduction in Steem reward or an increase.

In other to calculate the current Steem reward, we will be using the below formula.

     New Steem = (Virtual supply × Inflation rate) / Number of blocks per year.

We can refer to Steemworld.orgto find the virtual supply.

Now we have found the virtual supply we can proceed to calculate for the current Steem reward per block.

New Steem = (Virtual supply × Inflation rate) / No of blocks/yr.

New Steem = (481,154,108.832 × 6.8) / no blocks per/ yr

Now we will need to get the value of number of blocks per/yr

If one block is produced every 3 seconds, how many blocks will be produced in a year?

(365 × 24 × 60 × 60)/3

= 10,512,000

Now let's proceed to find the number of Steem produced per block.

No of new STEEM = (481,154,108.832 × 6.8) / 10,512,000

= 311.2/100

= 3.1 Steem per block.

With the current inflation rate, 3.1 Steem is produced every 3 seconds.

Taking that the inflation rate increase by 0.01% every 250000 block, we can calculate the possible inflation rate in few years.

......Let's proceed.

If it takes 3 seconds to produce 1 block, how long will it take to produce 250000 blocks.

3 = 1
y = 250,000

y = 750,000 seconds.

750,000/ (60 × 60 × 24)

= 8.6 days.

Therefore it takes 8.6 days to produce 250,000 blocks.

This means that the inflation rate decreases by 0.01% every 8.6 days. How much will it decrease in a year?

8.6 days = 0.01
365 days = y

y = 0.42%

Therefore the inflation drops by 0.42% every year. This means that the current inflation rate of 6.8% will be reduced by 0.42% in a year time.

That will give us (6.8 × 0.42)/(100×100)
=0.0002856
= 0.0002856 × 100
= 0.02856
= 6.8 - 0.02856
= 6.77 %

The inflation rate will drop from 6.8 to 6.77 in a year time.

Therefore, the new Steem reward that will be produced using this inflation rate will be.

( 481,154,108.832 × 6.77 ) / 10,512,000

= 3.0 STEEM

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Now we have seen that the new Steem that will be produced by next year is less than what is being produced now therefore it is much easier to earn Steem now and build our Steem power before the reward is reduced even further.

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CONCLUSION

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Steem inflation is a necessary topic to talk about as it will energize steemains and encourage them to build their Steem power before the reward gets even smaller.

I will like to invite, @nadiaturrina, @patjewell and @mini80 to join in this contest.

Thanks for reading