Has the $AR currency of Arweave tightened?

Has the $AR currency of Arweave tightened?

Has the $AR currency of Arweave tightened?

Is Arweave (AR) deflationary?

It is often said that hype is the best PR. This is certainly true! Recently, the upward trend of AR has gained more attention and curiosity in the industry. Many people have come to me asking about the current situation of Arweave, and one of the common questions is whether AR has started deflating.

While I cannot give an absolute answer, I hold the same view. The mechanism of Arweave is designed to lead AR in that direction. Today, I came across an article on X written by a French Arweave ecosystem project, AkordTeam, which discusses the topic of deflation. I believe it is necessary to introduce its content to everyone.

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To be recognized as deflationary, a cryptocurrency must have a decreasing supply over time. This decreasing supply gives the cryptocurrency scarcity, thereby increasing its value. Typically, this decrease in supply is achieved through a mechanism called “burn,” which sends a certain amount of the cryptocurrency to a black hole address, removing it from circulation. Although Arweave lacks this burning mechanism, it has a feature that moves tokens from circulation to an endowment fund.

So, does this make AR deflationary?

The first factor in determining whether a cryptocurrency is deflationary is whether it has a maximum or supply limit. A supply limit is a restriction on the total number of tokens that will ever exist. If there is no supply limit, the deflationary aspect must be considered in terms of the relationship between the amount of tokens burned and the amount of tokens entering circulation at a given time, similar to a math problem of filling and draining a swimming pool.

Arweave has a maximum supply of 66 million AR tokens. Initially, 55 million tokens were minted and entered the market. The remaining 11 million tokens are mining rewards, of which 10,708,000 tokens have already been mined. This means that 99.56% of AR tokens are already in circulation. With only 292,000 AR tokens (approximately 0.44% of the total supply) remaining uncirculated, the inflation pressure is evidently very low.

The mining reward

Currently, the mining reward per block is approximately 0.75 AR, and it will halve every year. This means that the rate at which remaining tokens enter circulation will further slow down. Arweave mines about 660 blocks per day, resulting in a daily increase of approximately 500 AR tokens in circulation. According to the halving mechanism, the daily increase will decrease to 250 AR tokens after one year, 125 AR tokens after two years, and so on.

Arweave’s Endowment mechanism

Arweave is a permanent storage network, and considering this, its mechanism needs to take that into account. When users store data on Arweave, they pay a storage fee that is pre-paid for at least 200 years. If this storage fee is paid in full to the miners, there will be no way to enforce miners’ future behavior, which poses a risk to the security and stability of the data.

Therefore, Arweave has implemented a mechanism called Endowment (translated as “storage insurance fund” based on its function). The one-time storage fee paid by users is not entirely distributed to miners. Only a small portion is currently distributed to miners (currently 16.67%), while the majority automatically enters the Endowment fund. This fund will be used to pay miners based on a specific algorithm to ensure that the block rewards for storing data are always higher than the miners’ storage costs. In other words, when the storage cost exceeds the block reward, the Endowment fund will subsidize miners according to the algorithm.

Based on observations and calculations, the storage cost has 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 decrease rate of 0.5% for storage costs. Even with such a decrease rate, Arweave’s current Endowment mechanism can meet the storage needs for at least 20 full-network data copies throughout its lifecycle.

Future use of the Endowment fund

So, when will the AR tokens in the Endowment fund be used?

Currently, it is unlikely that the funds in the Endowment will be used in the short term, until Arweave’s permanent weaving network expands to be several times larger than the current surface network. This is because storage costs are relatively lower compared to hash calculations, and the subsidies for storage costs that result from high storage costs have not been triggered yet. This is a key factor in this prediction.

It is worth noting that since the birth of Arweave, no tokens have been withdrawn from the Endowment fund.

Furthermore, the ongoing trend of decreasing storage costs may result in the Endowment fund never releasing tokens or only releasing a small amount in the future. This means that the majority of tokens may forever remain locked in the Endowment fund and cannot enter circulation.

Therefore, we can also consider the Endowment fund mechanism as a quasi-token burning mechanism for Arweave.

Will AR be deflationary?

Now it’s time to draw a conclusion.

If Arweave gains recognition and widespread adoption, one result will be more AR tokens locked in the Endowment fund. Combined with the halving of mining rewards, when the number of tokens locked in the Endowment fund exceeds the number of 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 the beginning of 2026.

Of course, there are views that the Endowment fund may not fully make AR deflationary. While this is true, considering that the tokens in the Endowment fund have never been used since its inception, and most of them may never re-enter circulation, it increases our confidence in this judgment.

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This article is based on the original article with my own thoughts and reflections added. If you want to read the original article, you can follow AkordTeam, a high-quality European ecosystem project. They are not only good friends of mine but also create products that are stunning in terms of UI and experience. Interested friends may want to check them out.

Original article link: [link]

This article is authorized and reposted from the Arweave Oasis Chinese channel.