Is Arweave (AR) deflationary?
By Muhammad Ahmed, Akord
Translated by Arweave Oasis Chinese Channel
It’s true that good PR is essential. And recently, AR has been gaining strong momentum, attracting more attention and curiosity within the industry. Many colleagues in the field have been asking about the latest updates from @ArweaveEco, and one common question is whether AR has started deflating.
While I can’t give an absolute answer, I share the same perspective. Arweave’s mechanism is designed to move AR in that direction. Today, I came across an article on X written by @AkordTeam, a French Arweave ecosystem project, discussing the topic of deflation. I believe it’s necessary to introduce the contents to everyone.
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For cryptocurrency to be considered deflationary, its supply must gradually decrease. This decreasing supply over time creates scarcity, thereby increasing the value of the cryptocurrency. Typically, this supply reduction is achieved through a mechanism called “Burn,” which sends a certain amount of cryptocurrency to a black hole address, effectively removing it from circulation. Although Arweave lacks this burn mechanism, it has a feature that moves tokens from circulating supply to a storage endowment fund. So, does this make AR deflationary?
Maximum Supply
The first factor in determining if a cryptocurrency is deflationary is whether it has a maximum or supply cap. The supply cap limits the total number of tokens that will ever exist. Without a supply cap, the relationship between the burned tokens and the tokens entering circulation at a given time needs to be considered. This is similar to the mathematical problems we used to solve as children, where water simultaneously entered and exited a pool.
Arweave has a maximum supply of 66 million AR tokens. Initially, 55 million tokens were minted and entered the market circulation. The remaining 11 million tokens are mining rewards, with 10,708,000 tokens already mined. This means that 99.56% of AR tokens are already in circulation.
Since only 292,000 AR tokens (approximately 0.44% of the total supply) are yet to be circulated, the inflation pressure is evidently very low.
Mining Rewards
Currently, the mining reward per block is around 0.75 AR, which will halve annually. This implies a further slowdown in the rate of tokens entering circulation. Arweave produces approximately 660 blocks per day, resulting in a daily increase of around 500 AR tokens.
Based on the halving mechanism, a year later, the daily increase will decrease to 250 AR tokens; two years later, it will drop to 125 AR tokens, and so on.
Arweave’s Storage Endowment Fund Mechanism
Arweave is a permanent storage network, and its mechanism needs to consider this aspect. When users store data on Arweave, the storage fee they pay is a one-time payment for storing the data for at least 200 years. If this storage fee is paid in full to miners, there would be no mechanism to constrain their behavior, resulting in risks to data security and stability.
Therefore, Arweave has established a mechanism called the Endowment, which I prefer to translate as the Storage Endowment Fund. The one-time storage fee paid by users is not entirely distributed to miners. Currently, only a small portion (about 16.67%) is distributed to miners, while the majority automatically enters the Storage Endowment Fund. This fund pays miners according to a specific algorithm to ensure that their block rewards for storing data always exceed their storage costs. In other words, when the storage cost exceeds the block reward, the Storage Endowment Fund will subsidize miners based on the algorithm.
Based on observations and calculations, storage costs have been decreasing at an average rate of approximately 38.5% per year over the past 50 years. In its latest whitepaper, Arweave conservatively assumes a yearly storage cost reduction rate of 0.5%. Even at such a rate, the current Storage Endowment Fund mechanism can meet the storage of at least 20 full network data copies throughout their lifecycle.
Future Use of the Storage Endowment Fund
So, when will the AR tokens in the Storage Endowment Fund be used?
Currently, it is unlikely that the funds in the Storage Endowment Fund will be utilized in the short term until the Arweave network expands to several times the size of the current surface network. This is because storage costs are relatively low compared to hash calculations, and the storage subsidy triggered by excessively high storage costs has not yet been activated. This is a key factor in the prediction.
It’s worth noting that since the birth of Arweave, no tokens have been withdrawn from the Storage Endowment Fund.
Furthermore, the ongoing trend of decreasing storage costs may result in the Storage Endowment Fund never releasing tokens or only releasing a small number of tokens in the future. This means that the majority of tokens may forever remain locked in the Storage Endowment Fund and cannot enter circulation.
Therefore, we can consider the Storage Endowment Fund mechanism as Arweave’s quasi-token burning mechanism.
Is Arweave’s AR deflationary?
Now, it’s time for a conclusion.
If Arweave gains recognition and widespread adoption, one result would be more AR tokens locked in the Storage Endowment Fund, combined with the halving of mining rewards. When the number of tokens locked in the Storage Endowment Fund exceeds the tokens entering circulation from mining rewards, AR will enter a deflationary state.
Based on current trends, we predict that #Arweave ($AR) may transition to a sustained deflationary state by the end of 2025 or early 2026.
While it’s true that the Storage Endowment Fund may not entirely lead to AR entering a deflationary state, considering that the tokens in the fund have not been utilized since its inception, and most of them may never re-enter circulation, this increases our confidence in this judgment.
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This article is based on the original text, with the addition of my own thoughts and opinions. If you want to read the original article, you can follow @AkordTeam. Akord is an excellent European ecosystem project, and they are not only good friends of mine but also create products that are stunning in terms of UI and user experience. Interested friends can check them out.
Original Article Link https://akord.com/learn/is-arweave-deflationary
This article is authorized for reposting from the Arweave Oasis Chinese Channel.
