Steemit Crypto Academy Contest / S9W3 - STEEM Inflation

Assalamualaikum everyone,

What's up, guys? I hope that all of you will be doing well and enjoying the time with the grace and blessings of Almighty Allah. Today, I am here to be a part of the week 3 contest in the beloved community SteemitCryptoAcademy with a very interesting topic, STEEM Inflation. So, let's start the discussion without any waste of time.

_{Thumbnail Created By WePik}

---

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

---

Inflation is a very common term that is commonly used in the economics and study of financial aspects. The term Inflation refers to the rate of increase in the prices of goods and services as compared to the previous prices.

In other words, we can say that inflation is the decline in the purchasing power of a particular currency which is used to avail various goods and services. An increase in the inflation rate is a very big issue in many countries and states and the public of that area has to experience various difficulties because the costs of living are increasing day by day.

There are many countries that calculate the inflation rate on an annual basis. For example, the annual inflation rate of a country is 5%. It means that if you have 100$ at the start of the year then the purchasing power of the same amount will be 95$ at the end of the year.

Where the purchasing power of a currency is decreased in inflation, the cost of the services or goods is also increased accordingly. Let's consider another example of a country with a 5% annual inflation rate. It means that if you have a plot worth 1000$ at the start of the year, then after one year, it would be worth around 1050$. So, this is a simple explanation of the concept of inflation.

Causes of Inflation

We have discussed what is actually inflation. So, now I will discuss some important causes of the inflation.

First and the most important cause of inflation is the increase in the demand for goods or services within a particular area and in a particular time period.

When the supply of a currency is increased in the area where it is adopted, it will also increase the inflation rate because the service or goods providers will demand more currency.

Another reason for the increase in inflation is the decrease in the supply of particular goods or services in the area but the demand remains the same.

If the manufacturing cost of some goods or services is increased then it will surely increase the inflation rate because the providers will ask more price for that particular good or service.

Effect of Inflation on Cryptocurrency

Off course, there is a great effect of the inflation rate on cryptocurrencies. The most important effect is that the adoption of cryptocurrencies is also affected by the inflation rate in fiat currencies.

If the inflation rate of the fiat currencies is high then the investors would prefer the cryptocurrencies because they know that they can be benefited as they can purchase the same services with a low amount of crypto as compared to the fiat currency. This will actually increase the demand for cryptocurrency and hence the price will increase as the adoption increased.

On the other hand, when the inflation rate in the fiat currencies is declined then the investors prefer the fiat currencies due to their low supply. In this way, the adoption of crypto will decrease which can lead to a decline in the price of crypto because demand is less than the supply of that crypto asset.

Different blockchain platforms have adopted different schemes and methods to maintain the balance between inflation and adoption. We all know that the price of a cryptocurrency is highly affected by its demand and supply in the market. If the demand is high, the price will increase and vice versa.

If we take the example of the Bitcoin cryptocurrency, its inflation rate is decreasing over time, at present its inflation rate is 1.8% and this rate decreases as the new coin creation is halved after every four years and this also leads to the increase in demand and reduction in the supply of Bitcoin. In the upcoming years, the miner will find it very difficult to mine the Bitcoin because inflation rate will decrease and the rate of new token creation will also decrease.

---

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

---

On the basis of the inflation rate, cryptocurrencies are divided into two basic types which are discussed below, one by one.

Deflationary Cryptocurrencies

Deflationary cryptocurrencies are those crypto tokens whose inflation rate decreased with the passage of time. As I have already said that a decrease in inflation means a decrease in the total supply of the tokens. There are different mechanisms and schemes that are adopted by deflationary cryptocurrencies. Some of them are discussed below.

• Burning of Tokens:

Token burning actually means the reduction of the tokens from the circulation supply of that token, thus maintaining the value of the token. For burning, the respective tokens are sent to the specialized null addresses which are actually the wallets just like the black holes. The send tokens are permanently removed from the circulation supply.

• Reduction in Mining Rewards:

Another mechanism that deflationary cryptocurrencies adopt is the reduction in the mining rewards of the tokens. When the mining rewards are reduced with time, the supply of the tokens is reduced because fewer tokens are added to the circulation supply. Bitcoin has also adopted this scheme because we know that the mining rewards of Bitcoin are halved after every four years.

• Fixed Supply of Tokens:

Some of the cryptocurrencies also adopted this mechanism according to which the supply of a token is fixed. So, when the part of tokens is burnt or lost, this may lead to a reduction in circulating supply and hence improve the value of the token because demand remains the same.

Inflationary Cryptocurrencies

Inflationary Cryptocurrencies are actually those crypto tokens whose inflation rate increases with the passage of time. As I have already discussed that the inflation rate of a crypto asset is increased when the supply of that token is increased. There are some mechanisms that are adopted by inflationary cryptocurrencies to increase the supply with the passage of time. Some of them are discussed below.

• Mining Rewards:

One of the important mechanisms that are used by inflationary cryptocurrencies is that these blockchains allow the miners to validate the transactions and earn good mining rewards which are fixed for each block produced. With the passage of time, new tokens are minted and added to the circulation supply and hence increasing the inflation rate of that token.

• Constant Issuance of New Tokens:

The consensus mechanism that is adopted by the blockchains is helpful for them to contribute to their supply. They continuously produce new tokens and reward the investors, stakeholders, or miners of the network. So, in this way, the supply is increased with the passage of time and hence the inflation also increases.

Strategy Followed By Steem Token

We all know that the Steem token is actually the native token of the Steemit platform. To answer this question, I would say that Steem is an inflationary token for the above-mentioned reasons. But there are also some deflationary elements that are followed by the Steem token. Let's discuss things in the form of the below points.

• The supply of the Steem tokens is increasing day by day as the content creators and curators are rewarded with the newly generated Steem tokens.

• The inflation rate of the Steem token is decreasing day by day which means that it would be difficult to earn the Steem tokens in the future.

• The burning scheme has been introduced which is known as #burnsteem25 and thus, the circulation supply is been reduced thus it is a deflationary element.

• The addition of the new blocks in the Steemit blockchain is rewarded with the Steem tokens as the block creation reward and thus it is an addition to the supply so it is also an inflationary element.

• The staking of the Steem tokens is appreciated in the form of the club systems, it is also a deflationary element because the circulation supply is reduced due to the locking of tokens.

So, keeping in view the above points, we can say that the Steem token is actually an Inflationary token but some steps are taken by the team to ensure the equilibrium between inflation and adoption.

---

Calculate the Current Inflation Rate (the day of preparation for publication)

---

Well, there is a formula to calculate the current Inflation rate of the Steem token at a particular time which is discussed below,

(978 - (head_block_number / 250000)) / 100

For the calculation of the current inflation rate, we need the head_block_number which can be accessed from the steemworld.org.

_{S.S Taken From SteemWorld}

We have got the Head Block Number which is 74,297,785. So, we have to put it in the above formula and after some calculations, we will get the Current Inflation Rate.

CIR = (978 - (74,297,785 / 250000)) / 100

CIR = (978 - 297.19) / 100

CIR = 680.81 / 100

CIR = 6.80%

So, the Inflation Rate at the time of the creation of this post is 6.80%

---

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?

---

To determine whether it would be easy or difficult to earn Steem tokens in the future, it is very much important to determine whether the block reward will decrease or increase in the future.

If the block reward will increase in the future then it means that it would be easy to earn Steem tokens in the future as compared to now and if the block rewards will decrease then it would be difficult to earn Steem in the future.

So, let's determine whether block reward will decrease or increase. For that, first of all, I will calculate the current block reward or how many Steem are produced per block at this time. There is a formula to calculate the New Steem produced which is given below.

New Steem = ( virtual_supply * inflation_rate ) / (Number of blocks per year )

We have already calculated the current inflation rate. So, we will need two more things which are, virtual_supply and Number of blocks per year. We can get the virtual supply from the steemworld.org tool as shown below.

_{S.S Taken From SteemWorld}

In the above screenshot, we can see that the virtual supply is 481,231,074 STEEM.

But, still, we need one value which is the Number of blocks per year. We know that one block is produced in 3 seconds on the Steemit platform. So, the annually produced blocks can be calculated as,

No. of blocks per year = (365 * 24 * 60 * 60) / 3

No. of blocks per year = 10,512,000

So, now I will put all these values in the parent formula to determine the New Steem as below.

New Steem = (481,231,074 * 6.80% ) / (10,512,000)

New Steem = 3.112 STEEM

So, at the current inflation rate, 3.112 STEEM are produced per newly generated block. Now, we will determine the inflation rate up to the upcoming year and then we will determine the Steem rewards produced at that inflation rate. So, this will help us to compare the current reward and determine whether the rewards will increase or decrease in the future. So, let's start the procedure.

We know that the inflation rate is decreased by 0.01% after every 250,000 blocks. So, if one block is produced in 3 seconds then 250,000 blocks time can be calculated as,

3 : 1 :: x (time) : 250,000

x (time) = 750,000 sec.

Let me covert this time into days as below,

Time in days = 750,000 / (60 * 60 * 24)

Time = 8.6 Days

So, 250,000 blocks will be produced in 8.6 days. It means the inflation rate decreases by 0.01% after every 8.6 days. Now, I will calculate the annual decrease in the inflation rate as,

8.6: 0.01:: 365: decrease per year

Decrease per year = 0.42%

This means that the current inflation rate 6.80% will reduce by 0.42% after one year. Let me calculate the inflation rate after 1 year.

Inflation rate after one year = 6.80% - 0.0285% (0.42% of current inflation rate)

Inflation rate after one year = 6.77%

Now, we will calculate the amount of Steem that will be produced at the inflation rate calculated above after one year.

New Steem = (481,231,074 * 6.77% ) / (10,512,000)

New Steem = 3.099 STEEM

So, it is clear that the block rewards that would be produced after one year will be less than that of which is produced now. It reflects that it would be difficult to earn Steem in the future as compared to now.

The initial inflation rate was 9.5% which is decreasing at the rate of 0.42% per year until it would reach 0.95% where it will saturate. And as the inflation rate decreases, the block reward will also decrease.

Should we push to Built SP Now?

In the answer to this question, I would surely say 'Yes'. It's the right time to invest in the Steem ecosystem and the staking of Steem in the form of SP is the best way to invest in the Steem token. Based on the above discussed, we know that it would be very much difficult to earn Steem tokens in the future.

The Steem token will become more valuable in the future as the rewards will be decreased and so I would surely prefer building up my Steem Power so that I would be able to take good advantage of the profit when the Stem token price will increase in the future.

---

Conclusions

---

The term inflation means the increase in the price of goods or services or a decrease in the purchasing power of a currency. As the inflation rate decreases the Steem token will become more rare and hence it is the best time to work hard and gather good Steem Power. The Steem inflation rate is decreasing by 0.42% after every year.

---

I would like to invite my friends @malikusman1, @fantvwiki, @suboohi and @cryptoloover to take part in this contest.

---