Considering ADA has a max circulating supply, and productivity of goods and services always tends to grow, does that mean ADA will always be deflationary in the long run? Couldn't that lead to recurring recession environments which discourage people to spend/borrow?
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3 Answers
Yes Sir. ADA has a fixed supply and just like Bitcoin it is always going to be deflationary. It's the mindset. What is "deflationary"? That's only when you convert it to FIAT correct? The whole purpose of Crypto is not ultimately converting it into FIAT. If you remove FIAT from the picture, people will use it as SOV and also for transactions as value exchange. Then the whole concept of "deflationary" will slowly die and we will only be talking about "finite supply".
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1I’m not talking about deflationary when converted to fiat currency. Deflationary means that as time passes, you need less units of currency to buy the same things. If we remove FIAT from the picture, it can still be deflationary. Suppose you can buy 1 coffee with 1 ADA now, than next year you can buy 2 coffees with 1 ADA, then 5 and so on. That means ADA is deflationary. If productivity of goods and services tends to always increase, that means things get cheaper, and if the currency supply is limited, that means its always going to be deflationary in the long run, discouraging people to spend Commented May 26, 2021 at 22:31
In Cardano, ADA is a synthetic resource that is used for many purposes. Charles explained it in detail in this video https://youtu.be/lMZ1xQzWtl4
So the finite supply is a desirable feature. The deflationary effect is a consequence.
The differences between Store of Value (SOV) and a unit of exchange is natural because they don't serve the same purpose. People expect SOV to hold its value over time and protect them from any inflation, including the inflation that results from growth in productivity.
Your concern is genuine that there is an incentive to hold (HODL) any store of value, not just ADA. Stable coins and fiat currencies are designed to be units of exchange and lose value with inflation. So there is an incentive to spend them before they lose value. So there is a place for both; we need SOV for long-term savings and units of exchange for short-term disposable cash.
In our financial systems we have both; however, the conversion between the two has a lot of friction caused by layers of middlemen and by the burden of record-keeping required by laws designed to prevent money laundering and terrorist financing.
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Gold was a store of value and a unit of exchange before going off the gold standard. Dollars and notes were just an easier way to represent the gold. I think BTC and crypto has a strong HODL incentive in the early stages now (make lots of money) but will degrade as the market caps level out at a maxim– JoshCommented Aug 13, 2022 at 8:28
Also keep in mind that until all ADA is minted (i.e. until circulating supply = total supply), it is actually inflationary with a smoothly decreasing inflation rate.
At that time it truly becomes deflationary. And that won't happen for hundreds of years I think.
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It can be deflationary while increasing (slowly) the circulating supply. If the productivity of goods and services increases, the price for those items decrease (it requires much less work now to produce a car or a cellphone or a potato, than 10 or 100 years ago). So even if the currency supply is increasing, if the productivity of things is increasing even more, the currency is deflationary, because things gets cheaper. Commented May 26, 2021 at 22:20