Espresso author BEN LILLY discusses the impact of Arweave’s token supply policy and technological advancements on the deflationary effect on the price of AR tokens.
Arweave is a decentralized permanent data storage solution that almost meets all the definitions of success in the cryptocurrency field: it has raised a lot of funds, its usage is growing even in bear markets, it has a vibrant developer ecosystem, and many protocols are integrating it into their own protocols. However, since September 2021, the price of AR has dropped from over $70 to around $6 in less than 10 months.
Firstly, a large amount of AR tokens were unlocked when the price was rising, which put tremendous downward pressure on the price due to the new token supply. Especially when demand weakened, the price was at an extreme parabolic level. On the other hand, technological advancements bring about deflation. Around September 2021, Arweave released a layer-two solution called Bundlr, which made storage easier, cheaper, and improved workflow. However, the token economy model depends on the supply-demand relationship. Users spend AR to pay for permanent storage fees on Arweave, which means more usage brings demand for AR. But with Bundlr, users no longer need as many tokens to store data, and the decrease in demand leads to a lower price level. At the same time, the increase in token supply also exacerbates this decline.
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This illustrates a common phenomenon in cryptocurrencies, where protocols increase usage by improving costs but overlook the deflationary pressure on their tokens. Ethereum, before its merger, reduced ETH supply through EIP-1559. Hopefully, more protocols will consider deflationary pressure and learn from Arweave’s price performance in the future.