ADA: non inflationary policy
Cardano has a clear monetary policy and incentive policy to keep the network stable based on its PoS consensus protocol.
The established supply is 45 billion ADAs that will be in circulation. It will never change, thus making ADA coins a precious resource.
Currently, February 2021, the circulating supply is approximately 31.2 billion coins, so the remaining 13.8 billion will be gradually released (monetary expansion) by the protocol at each epoch (every 5 days), in the following years and until exhaustion.
The protocol rewards pool operators and delegators for their active participation in decentralization.
Where do the ADAs come from to pay the rewards for each epoch?
There are two sources to fund the rewards for each epoch:
- Transaction fees: these have recently increased to 150,000 transactions in each epoch. A typical transaction fee is approximately 0.17 ADA, so today 25,000 ADAs are charged per epoch to reward participation (pool operators) and delegation (delegators in pools).
- Monetary expansion: set at 0.22% on the reserve balance for each epoch.
How are the rewards from each epoch distributed?
Of the total of the two sources of income, 20% is earmarked for the Treasury and the remaining 80% is used to reward operators and delegators.
The Voltaire Era collects funds in Treasury that will be used for governance for projects voted by the community and for changes to the blockchain system when there are CIP proposals (Cardano Improvement Proposals).
Today the monetary expansion per epoch is higher than the rewards, so after allocating the portion defined for Treasury and distributing rewards, the remaining balance of monetary expansion returns to the ADA reserves to be incorporated into the circulant in subsequent epochs. In this way, monetary expansion is slowed down.
Transaction fees collected per epoch are distributed in full as rewards, but ADAs arriving from reserves only partially do so, the remainder is returned.
The release of new ADAs at each epoch is monetary expansion because it increases the circulating supply, whereas the collection of transaction fees does not increase the circulating supply, as they simply flow from those who pay fees to those who collect rewards.
In the early years of Cardano monetary expansion will be the main resource for rewards, but then it should be gradually and exclusively replaced by charging transaction fees, as reserves will die out and the number of transactions will grow over time due to the usability of the network.
It is expected that approximately every 4 to 5 years the reserves for the rewards budget will be halved.
From economic analysis, a monetary policy is inflationary when the circulating currency exceeds the demand for its use in transactions.
If there is an abundance of a certain good, and it does not have enough demand to be used up, its price tends to fall, that is, it devalues.
The same thing happens with money. If there is a lot of money in circulation in excess of its use, over time more and more of it will be needed to pay for the same goods and services. Inflation is a product of monetary devaluation.
There is an increase in the use of the network and having a limited amount of supply of ADAs with gradual expansion over time does not produce a monetary excess in the system.
Cardano’s monetary policy tends towards deflation, valuing the currency, but this depends on the increasing adoption of the blockchain, and as can be seen this is happening.
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