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TLDR: When injecting fresh liquidity, you could trigger an inflationary pressure, especially when the tokens are currently not being used for value creation. So you need to find a way to reduce the inflationary impact.
3 Steps to Reduce Inflationary Impact
How can you do this? 3 steps.
Lock up tokens so it does not increase the total available and liquid circulating quantity of tokens.
You can either increase staking reasons or you increase the unlocking period of the staked tokens. Both are to decrease the available and liquid supply of tokens.
Then, inject fresh liquidity to areas that require liquidity for value creation. You would not have the effect of liquidation from staked tokens, to compete with the fresh liquidity to create inflationary pressure.
Why do this
Your goal as an economist or ecosystem designer is create healthy balance of inflationary and deflationary factors. Inflation comes from value creation, deflation comes from value realisation.
Lessons Learnt from China’s Real Estate Market
Inflation and recession are both here, which results in a negative macro impact on the nation. As a government, what can you do? You can increase gov stimulation, which is increase money in the system to encourage people to spend. But there is a problem! Doing too much of that will worsen the current inflationary pressure, which means people will find it hard to afford things. This is due to the many rounds of gov stimulation during covid to boost local demand. So what can we do? Find ways to reduce capital and cash in the market through capital sinks or lock ups. Then when fresh money is injected into the system, this impacts the current inflation less.
Top down approach: Gov Policy
Reduce credit to real estate market in China. This is evident as lenders (e.g. banks) are tightening) their mortgage lending requirements to home buyers. Specifically, HELOC — home equity line of credit. That means loaning (leverage loan) the second time based on your property. This increases available money for people, but if the government wants to target specific industries, there needs to be less available cash readily available for loan by users, to use it however they want.
Outcomes (top down): This results in less liquidity from the real estate industry. Meaning if you own real estate and you want cash, you need to sell it at a massive discount because there are less buyers available (due to tightening requirements by lenders) and more sellers (due to the inability to leverage as easily).
Real estate is a medium for intergenerational wealth transfer (as in an investment, not currently used for this period’s consumption except for maybe rent yields at 2.1% pa. Source. And dropping per year due to slow population growth). 70% of household wealth is in property. Investing in real estate “locks in” savings in this asset class (i.e., cash sink in this system). This available funds cannot be used for “value creation”, as in current consumption.
What does this mean? You need manage inflation.
Other considerations (bottom up)
There is 1.5 trillion yuan of mortgage loans linked to unfinished residential projects and people are defaulting on the mortgage payment in fears that the housing will not be built. And sadly many Chinese developers have defaulted on the bonds due to the liquidity crunch and fall in real estate prices.
The government can increase the time period of capital sinks through making the secondary property market less liquid, but this can worsen other marco market problems. There needs to be other solutions. A possible option is the government being the “builder of last resort” and fund the completion of unfinished projects. But this could add additional capital burden for the gov and it is not sustainable in the long-run. (Yes, you can argue about the FED takeover of Fannie Mae and Freddie Mac, but it’s a different fundamental situation, and hence different solutions.
Relevance to crypto
Your tokens, TKN, are locked up in a staking contract. Say you earn 2% APY. There is an unlocking period of 12 months. Your locked tokens are veTKN. You can sell veTKN at a 30% discount in the open market, if you don’t want to wait for that 12 months unlocking period. Other people will buy it because they can afford to wait longer.
The protocol releases new TKN to the circulating supply. This TKN is technically used to stimulate certain value creating activities in your game economy. For example, instead of breeding assets (UGC NFTs), you want to incentivise battles between users in a new battle arena. The TKN added to the economy can be a temporary subsidy for battle passes, to encourage users to experience and play the new battle arena.
If you want to implement this idea, it is important to consider (a) the reason for staking and (b) impact for increasing lock-up periods. There is always a running joke in token economics, where if you can’t think of utility for your tokens, slap on a “staking contract”, and it adds utility. This mechanism can fall into that trap, where you are increasing staking reasons for no reason or increasing lock up periods for no reason. As consumer sentiment key in economies we build, staking or increasing the lock-up period for no reasons will negatively impact the success of reducing inflation.