Why do some blockchains have fixed token supplies (e.g., Bitcoin’s 21M cap)?
For several strategic and philosophical considerations, blockchains have fixed token supply limits, such as Bitcoin 21 million.
- Scarcity & Value Proposition
A fixed supply can create the illusion of scarcity, similar to gold. This will increase perceived value. This scarcity can create demand and position the cryptocurrency as “digital stores of value”. (e.g. Bitcoin as “digital Gold”). - Inflation Resistant
The hard cap stops devaluation through unlimited issuance. This is in contrast to fiat currencies that are subject to inflationary monetary policy. Users who are looking for assets that are immune to central manipulation will find this appealing. - Incentive structure
Fixed supplies align long-term network incentives. Bitcoin miners earn block rewards initially, but they diminish over time due to halving. They eventually depend on transaction fees. The network is protected even after the coins have been mined. - Decentralization, and the Trustlessness of
Decentralization is strengthened by predetermined distribution, which eliminates the central authority’s control of supply. The protocol rules are trusted by users, not intermediaries. - Economic and Psychological Appeal
A transparent and immutable cap on supply fosters confidence that the asset is predictable, attracting users and investors who prioritize long-term stability. - Use case Alignment
Bitcoin’s fixed-supply model is ideal for its role as a value store. Other blockchains, such as Ethereum, adopt flexible models that support diverse functions (smart contract, dApps), while maintaining inflation through mechanisms like fee-burning (EIP-1559).
Considerations and Trade-offs
- Deflationary Risks Hoarding can reduce its transactional use and challenge its role as an exchange medium.
- Lost coins: Permanent losses of tokens may unintentionally reduce the circulating supply and increase deflation.
- Adaptability Fixed models may not be as flexible in adjusting to changes in the economy, compared with adjustable models.
Fixed token supply is a deliberate choice that prioritizes scarcity, decentralization and anti-inflation. It’s tailored to the blockchain’s goals and specific use cases.
Read: How do zero-knowledge proofs enhance blockchain privacy?
