Fixed Supply

A fixed supply creates digital scarcity, a core tenet of the store of value narrative. Unlike fiat, which central banks can inflate, a hard cap makes the asset inherently resistant to debasement. This positions it as a potential hedge against inflation, similar to precious metals like gold. The economic argument is that scarcity, combined with utility or demand, can support long-term price appreciation.

In a system with fixed supply and growing adoption, deflationary pressure can emerge. As the network's utility and user base expand, demand for the finite tokens increases. If the token is also used for transaction fees that are burned (e.g., EIP-1559 on Ethereum), the circulating supply can decrease over time, creating a deflationary asset. This contrasts with inflationary fiat systems designed to encourage spending.

Fixed supply can exacerbate price volatility. With no mechanism to adjust supply in response to demand shocks, prices must absorb all market pressure. This makes the asset highly sensitive to sentiment shifts, leading to boom-bust cycles. Consequently, these markets are often dominated by speculative activity rather than pure utility-based valuation, as participants bet on future scarcity premiums.

A fixed supply represents the ultimate hard monetary policy. It removes discretionary control from any central authority, enforcing predictability. However, this rigidity is a double-edged sword:

• Pro: Eliminates risk of political manipulation or hyperinflation.
• Con: The system cannot increase supply to stimulate economic activity during downturns or to fund public goods, forcing alternative models like fee markets and protocol-owned treasuries.

Analyzing fixed-supply assets requires different models than traditional finance. Common frameworks include:

• Stock-to-Flow (S2F): Measures scarcity by comparing existing stockpile to new production.
• Network Value to Transactions (NVT): Analogous to a P/E ratio, comparing market cap to on-chain transaction volume.
• Metcalfe's Law: Proposes a network's value is proportional to the square of its users. These models attempt to quantify the value of scarcity and network effects.

Fixed supply stands in direct opposition to fiat currency systems, which use elastic supply managed by central banks to target inflation and employment. It also differs from algorithmic stablecoins or rebasing tokens, which programmatically adjust supply to maintain a price peg. The economic debate centers on whether a predetermined, inelastic money supply is superior to adaptive systems for long-term stability and growth.

A monetary policy where the total supply of an asset increases over time, typically through block rewards or staking rewards. This is the opposite of a fixed supply model.

• Purpose: Incentivizes network security (miners/validators) and can be used to fund a treasury.
• Example: Ethereum (ETH) has a net inflationary supply, though its issuance rate is dynamically adjusted via EIP-1559's fee burning mechanism.

A monetary policy where the total supply of an asset decreases over time. This is often achieved through token burning, where tokens are permanently removed from circulation.

• Mechanism: Burns can be protocol-mandated (e.g., a percentage of fees) or governed by the community.
• Effect: Creates scarcity pressure, which, if demand holds, can theoretically increase the asset's value. Binance Coin (BNB) uses a quarterly burn mechanism.

The absolute, hard-coded upper limit on the number of tokens or coins that will ever be created for a cryptocurrency. It is the defining parameter of a fixed supply asset.

• Immutability: This cap is typically enforced at the protocol level and cannot be changed without a consensus-breaking hard fork.
• Key Examples: Bitcoin (BTC) has a max supply of 21 million. Litecoin (LTC) has a max supply of 84 million.

The approximate number of coins or tokens that are publicly available and circulating in the market. It is always less than or equal to the maximum supply.

• Exclusions: It does not include tokens that are locked, reserved for the team, or held in a treasury.
• Importance: Used to calculate market capitalization (Price x Circulating Supply). For fixed-supply assets, this number approaches the max supply over time as more coins are mined or released.

In the context of a token sale or Initial Coin Offering (ICO), the hard cap is the maximum amount of funding the project aims to raise. It is distinct from, but related to, the concept of maximum supply.

• Funding Limit: Once the hard cap is reached, the sale ends.
• Supply Link: The total tokens sold during the sale, plus any allocated for team, advisors, and ecosystem, typically define the project's initial total supply.

An asset's function of maintaining its purchasing power over the long term. Fixed supply is a key designed attribute for cryptocurrencies aiming to be a digital SoV, as it mimics the scarcity of commodities like gold.

• Primary Argument: Scarcity protects against debasement from unlimited printing.
• Critique: Utility and network security are also critical; scarcity alone does not guarantee value. Bitcoin is the primary crypto asset marketed as a SoV.