Everyone has different opinions on caps. Some love them and some hate them.
Advantages and Disadvantages of Caps
Quick definition: It was pointed out to me that some people may not know what a "cap" is. A cap refers to the fact that some cryptocurrencies have a limit to how many coins will be minted. For instance, Bitcoin is "capped" at 21 Million BTC minted in the year 2140. An "uncapped" cryptocurrency will keep creating new coins indefinitely.
There are a few different advantages of a capped cryptocurrency.
- You don’t have to worry about hyperinflation; there can’t be any because the coin is limited.
- The coin is more likely to increase in value. The supply is low so the only thing needed to raise the value of the coin is demand.
- A capped coin naturally works well as a store of value. People who want to save money will naturally be drawn to this coin.
There is one main disadvantage of a limited cap coin; no one wants to spend it. This is the problem that all deflationary currencies experience. Everyone remembers the guy who bought a pizza for 10,000 Bitcoin; that would be 120 Million Dollars today. Of course, “pizza guy” is an extreme example but I know of other people who sold their Bitcoin at 20 Dollars or 100 Dollars. There certainly is an incentive not to spend your Bitcoin and that could be a problem. If no one wants to spend their Bitcoin what will they be used for? So far, Bitcoin’s main use case is store of value. It’s a good use case but I think there is a limited number of coins that can legitimately pull this off.
Disadvantages of an Uncapped Coin
Every uncapped coin has a different ratio for how they print their token and how high the inflation rate is. Most seem to start with a high inflation rate, mint lots of tokens and then gradually slow down to 2–4% inflation rate. What’s most important is that the tokens are not printed willy nilly (unlike the Federal Reserve) and that the minting rate can’t be changed or can only be changed by the will of the community.
There are several advantages of an uncapped token:
- Many of these uncapped coins are proof of stake projects that secure the blockchain by people holding the coins. This means that most of these projects are not proof of work and are more environmentally friendly than Bitcoin.
- Since these projects are proof of stake any community member can hold the token and be rewarded in the coins. This means that the inflation goes right back to the most active and dedicated members of the community. For many people this also provides a sort of savings account and gives some of the benefits that a capped crypto provides.
- It does not struggle with deflation. This means community members will be more willing to spend their crypto and use it in their day to day lives.
Here is where an uncapped crypto can go wrong.
- If the uncapped crypto is not managed correctly it could suffer hyperinflation and be abandoned by the community.
- There could be community infighting about the rate of minted tokens.
- Whales (people who hold most of the tokens) could completely take over the minting and completely determine the future of the crypto.
Overall, there is more potential use case for an uncapped crypto but more thought and better management must be put into setting up this type of coin.
If you are interested in learning more about cryptocurrency follow my Quora Space: The Crypto Cave.