Is Arweave (AR) deflationary?

Introduction

For a cryptocurrency to be considered deflationary, its supply of coins must gradually decrease. This decreasing circulating supply, over time, results in scarcity and potentially increases the value of the cryptocurrency.

Typically, this reduction in supply is achieved through a process known as 'burning', which involves sending a certain number of coins to an inaccessible address, effectively removing them from the circulating supply.

Arweave, while lacking a conventional burning mechanism, features an endowment that takes tokens out of the circulating supply.

But does this make AR deflationary? Let’s find out!

Maximum supply

The first factor to consider in determining if a cryptocurrency is deflationary is whether it has a maximum, or capped, supply.

A capped supply indicates a limit to the number of tokens that will ever exist. In the absence of a cap, you must consider the number of tokens being burned versus the number of tokens entering circulation at a given point in time.

Arweave has a maximum supply of 66,000,000 AR tokens. 55,000,000 were minted at genesis and have since entered the circulating supply. The remaining 11,000,000 were set aside as mining rewards, of which 10,708,000 have already been mined. This means that 99.56% of AR tokens are already in circulation.

With only 292,000 AR tokens (about 0.44% of the supply) left to be introduced, the inflationary pressure is minimal.

Mining rewards

The current mining reward per block stands at roughly 0.75 AR, halving annually. This gradual reduction means that the introduction of the remaining tokens into the circulating supply will continually slow down. With around 660 blocks added daily to Arweave’s blockweave, the current daily inflation rate is about 500 AR tokens.

To illustrate the impact of halving on inflation: a year from now, the daily rate will drop to 250 AR tokens, and in two years, it’ll be 125 AR tokens, continuing to decrease thereafter.

Arweave’s endowment

When you make your upfront payment to store your data on Arweave, it is not fully distributed to the miners. A small portion is paid initially while the rest of the payment, 83.33%, goes into the storage endowment. The funds in this endowment will be paid out as needed to keep the block reward for storing data higher than the cost of storage. 

On average, the cost of storage has declined by ≈38.5% per year over the past 50 years. In a highly conservative estimate, Arweave assumes a 0.5% annual decline when calculating data upload costs. Any time the cost of storage falls more than 0.5% a year, it extends out the lifetime that the protocol can pay to store at least 20 replicas (the minimum threshold) of your data.

Future use of the endowment

So, when will the AR tokens in the endowment be used?

Not anytime soon. The endowment is expected to remain untouched until the permaweb has expanded to a scale many times greater than the current surface web. This is due to the relatively lower costs of storage compared to hashing, a key factor in this projection.

An interesting fact to note: since Arweave’s genesis, no tokens have been withdrawn from the endowment.

Additionally, the trend of storage costs continuing to decrease will result in fewer tokens being released from the endowment in the future. This means a significant portion, or possibly even a majority, of the endowment’s tokens might never re-enter circulation.

Therefore, you can think of the endowment as Arweave’s quasi-token burning mechanism. I say quasi because it depends on how long these tokens remain locked for.

Could Arweave (AR) become deflationary?

As Arweave gains wider adoption, leading to more tokens being locked in the endowment and with the annual halving of mining rewards, AR could become deflationary. For this to happen, the number of tokens being locked in the endowment will need to exceed those being introduced into circulation from mining rewards.

Based on current trends, we anticipate that Arweave (AR) could transition to a consistently deflationary state by late 2025 or early 2026.

While there are viewpoints that the endowment might not fully qualify AR as deflationary, it’s important to note its impact. Given that the tokens in the endowment have remained untouched since genesis, and that some may never re-enter the circulating supply, this adds a significant deflationary aspect worth considering.

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This article is intended for educational and informational purposes only and should not be considered as financial advice.