Crypto Academy Contest / S9W3 - STEEM Inflation

Hello everyone, welcome to the third week of the SteemCryptoAcademy contest.

This week, we will be talking about Steem inflation and below in my entry.

Inflation is a very common monetary term which simply means the rate at which prices of goods increases over time or the rate at which the value of a currency decreases over a given period of time. It can also be referred to as the rate of increase in cost of living.

There are different causes of inflation and some of them includes;

• Cost push

Sometimes the prices of goods rise not because of currency devaluation but because the cost of production have increased.

• Increase money supply

This often leads to inflation as the currency tends to lose value as a result of increased supply.

• Devaluation

Devaluation occurs as a result of reduction of currency value in the foreign exchange market. This usually leads to inflation as the currency tend to be regarded as minor.

• Rising wages

This contributes a lot in the increased price of goods. When manufacturers are paid so much, the products they produce are often costly.

• Monetary policies, etc.

This deals with policies such as interest rate adjustments, bank reserves, etc. This regulations can either attract currency users or scare them away. In a situation whereby there are no much demand for a currency, the value tends to decrease.

Yes, inflation affects any form of currency with Cryptocurrency not being an exception. A simple way at which inflation affects cryptocurrency is through its increase in supply.

If you observe well, you agree with me that most cryptocurrencies with huge supply are often of lower values compared to the ones with small supply but this is not what we are talking about now as it doesn't define inflation. Inflation which deals with the rate at which the value of a currency decreases over time has a lot to do with cryptocurrencies because the value of cryptocurrencies are quite dependent on the rate of demand and supply.

When there's a high demand, the value increases and when there is a low demand the value decreases.

Several blockchain have a portion of their Blockchain token locked and this locked token are often been released either as a reward to the Blockchain users or it is partly unlocked over a given period of time. When these currencies are unlocked and are added to the circulating supply, it obviously increases the supply of the currency and thus causing a reduction in value unless an equal demand is met.

In a case where there is no increase in demand to meet the additional supply, the value of the cryptocurrency will most obviously drop and when this happens, the cost of living if users of the currency will most certainly increase and that's simply inflation.

• Inflationary cryptocurries

These are those type of cryptocurrencies whose supply are steadily increasing. This type of cryptocurrencies usually have a fixed number of maximum supply which when reached, there will be no more introduction of new coins into circulation.

In inflationary cryptocurrency, new coins are often introduced using various mechanism which includes;

-Proof-Of-Work
-Proof-Of-Stake
-Proof-Of-Brain

In Proof-Of-Work, miners are rewarded with new token thus releasing them into circulation untill there are no more coins to mine.

In Proof-Of-Stake, validators who stake their tokens on the Blockchain are rewarded with new tokens. This is a way of releasing the token into circulation untill a maximum supply is reached.

In Proof-Of-Brain, users of the blockchain platform are rewarded based on the intellectual Value they offer to the platform. This reward which can come in the form of voting, is a way of adding new coins into circulation.

• Deflationary cryptocurrencies

Just as the names says, deflationary cryptocurrencies deflate as time goes on. This is because unlike inflationary cryptocurrencies whose supply increases with time, the supply of deflationary cryptocurrencies decreases with time and this are often achieved using various means which includes;

-Token burn
-Transaction fees

Similar to inflationary cryptocurrencies, deflationary cryptocurrencies can have a fixed maximum supply but a fixed percentage of the supply is often been removed from circulation either annually or quarterly as the case may be.

Take for instance, a particular cryptocurrency might have an annual or quarterly deflation rate of 1%. This tells that 1% of the supply will be annually or qauterly removed thus making the cryptocurrency more scarce as time goes on.

With what we have explained regarding inflationary and deflationary cryptocurrencies, it is now safe to say that the Steem token is a inflationary cryptocurrency which means that the supply increases over time.

This increase is as a result of constant Steem reward on users who add intellectual value on the Blockchain platform. As more users emerge, more is being distributed thus increasing the supply.

This can cause an inflation in Steem price should the supply go way beyond the demand and that is why certain measures have been put in place to control the balance between Steem demand as it's ever increasing supply.

Some of these measures includes;

-Introduction of club status.
-Burning 25% to of earnings.

The club status is a way of making sure that most users and earners of Steem on the steemit platform do not withdraw all their earnings thus encouraging them to power up at least halve of whatever they earn on the platform. This power up increases the demand of Steem thus making the fight for demand and supply equilibrium much easier.

Also, the burnsteem25 initiative is a good one to help control the supply of Steem. In this initiative, a percentage of Steem mostly 25% is set to at null which is an unaccessible Steem wallet. This coins in the null wallet helps to hold the price of Steem by making sure that not all is accessible for withdrawal.

In other to calculate the current Steem inflation rate, will we be doing so using the below formula.

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

With all the values above, we will need to get the current value of the headblock using steemworld.org.

On Steemworld.org click on locate system info and under it you will find the headblock.

Now let's apply BODMAS in calculating the inflation rate.

According to BODMAS, we will solve the figures in brackets first, after which we substrate and then divide.

Inflation rate = 978 - (74,246,942/250000)/100
= 296.987
= 978 - 296.987 / 100
= 681/100
= 6.81%

In other to interpret how easy or difficult it will be to earn Steem in the coming years, we will have to calculate the current block reward using the below formula.

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

The virtual supply can be seen using the Steemworld.org

Virtual supply = 481,075,477

To get the number of block per year we will consider the time it takes to produce a block on Steem Blockchain and that is 3 seconds.

Therefore if 1 block is produced in 3 seconds, how many blocks will be produced in a year?

We will first check how many seconds are there in a year = 31536000 seconds.

3 seconds = 1 block

31536000 = X

X = 31536000/3

X = 10,512,000.

Now we have the values, we can proceed to calculate the current block reward using.

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

New Steem = (481,075,477 × 6.81%) / 10,512,000

New Steem = 311/100

New Steem = 3.11

It's is believed that the inflation rate of Steem decreases by 0.01% after every 250,000 blocks and it will continue like this untill the inflation rate reaches 0.95%.

If it takes 3 seconds to mine 1 block
How long will it take to mine 250,000 blocks.

3 seconds = 1
X = 250,000

X = 750,000 seconds

Converting 750,000 seconds to days it will give us 8.6 days.

This means that the inflation rate of Steem decreases by 0.01% after every 8.6 days.

If the inflation rate decreases by 0.01% every 8.6 days, it will be decreased by 0.42% after 365 days which is one year.

8.6 = 0.01%
365 = X

X = (365 × 0.01)/8.6
X = 0.42%

If the inflation rate gets to 0.95%, the Steem block reward will be reduced to (481,075,477 × 0.95%) / 10,512,000

Steem BR = 442,589,438.84/ 10,512,000
Steem BR = 42.1
Steem BR = 42.1/100

STEEM BLOCK REWARD = 0.421 STEEM

Therefore when the inflation rate gets to 0.95%, the block reward of Steem will only be 0.421 Steem every 3 seconds. This is 7.3 times less than the reward we get now which is 3.11 Steem every 3 seconds.

3.11/0.421 = 7.3

In summary, if takes an average person 1 year to earn 1k Steem reward now, by the time Steem inflation drops to 0.95%, it will take 7.3 years for an average person to earn 1k Steem reward.

Now let's project what time we have remaining for this to happen.

According to our calculations, the current inflation rate is 6.81% and this inflation rate drops by 0.42% yearly. Which means that by this time next year the inflation rate of Steem will be;

Let's first get the value of 0.42% of 6.18%
= (6.81/100) × (0.42/100)
= 0.0681 × 0.0042
= 0.00028×100
= 0.0286

FR of Steem next year will be;
6.81 - 0.0286
= 6.78%

If it takes 1 year for the inflation rate to drop from 6.81% to 6.78%, how long will it take to drop from 6.81% to 0.95%?

Let's first take the difference;

6.81- 6.78 = 0.03
6.81 - 0.95 = 5.86

0.03 = 1
5.86 = X

X = 5.86/0.03
X = 195.3 years.

With all the calculations, we have seen that the Steem block reward keeps decreasing and it best for one to hoard Steem now for more better price appreciation in the future.

Personally, I will focus more on building my SP now because the reward is much more higher compared to what it will be in the coming years.

The Steem cryptocurrency is an inflationary cryptocurrency which means that there's a constant increase in Steem supply over time. In as much as there's a constant increase in Steem supply, the rate at which this supply is distributed is in a constant reduction and for that reason, it is best to take advantage and build Steem power now that the inflation rate is a bit high.

I invite @starrchris @sahmie and @patjewell to take part in this contest.