Today we are talking about a parameter that is as old as currency and money itself. Our parameter today is the ‘monetary_expand_rate.’ This is the parameter that controls the rate at which Ada in reserve is put into circulation.
Cardano’s currency has a fixed supply of 45 billion. However, not all 45 billion is available to the public to use. Initially, just over 31 Billion was released. The remaining amount was put into a reserve. Every five days, when incentivisation payments in the form of staking rewards and public treasury deposits are made, Ada is removed from the reserve and put into public circulation.
Most public blockchain systems with their own currency have a similar setup. This is a way to bootstrap the system and its internal economy until there is enough economic activity to replace the reserve.
Cardano’s monetary expansion rate is currently .3% of the reserve balance. Over the course of five days (one epoch), all transaction fees are put into a virtual pot. Then .3% of the reserve is added to the pot. The pot has an ideal budget defined by math that is out of the scope of this article. This budget is then used to pay stake pool operators, ada holders that stake their ada, and put some into a treasury for future uses. If there are leftovers after the budget is met, it is put back into the reserve for future release.
It could happen that there might not be enough to meet the ideal budget. If there was a risk of this happening, it would be known ahead of time. To prevent it, the reward formula could be changed or the monetary_expand_rate could be updated. The monetary_expand_rate exists to give us that flexibility.
Why this is interesting
If you are thinking about how this plays out over time, you will realize that the overall size of the reserves is, by definition, dwindling. The rate at which it is doled out is steady at .3% every 5 days, but it is .3% of slowly decreasing total. Readers who are familiar with Bitcoin may know that the rate at which new Bitcoin is created and put in circulation is halved every 4 years. Cardano has the same idea, but instead of a big jump every four years, it’s tiny steps every five days.
Why you should care
If you hold and stake ada you might notice that amounts of ada you receive in rewards is trending towards smaller and smaller amounts. When staking first became possible, the annual rate of return for staking ada was 6-7%. That number has changed slowly over the past 2 years, and is now at about 3.5%. You’re not doing anything wrong, it is simply how Cardano was designed.
The big idea is that even though you get a lesser percentage in rewards over time, the value of Ada will keep increasing eventually to a stabilized amount that will continue to be enough to incentivize participation.
Also, it’s a good idea to know about your favorite blockchain’s monetary policy. One of the allures of blockchain systems with currencies is sound monetary policy that does not reduce the value of the currency you’re holding over time. With blockchains, because many actors around the world have to agree to changes, once the monetary policy is put into place, it’s hard to change. Auditing a blockchain monetary policy should be one of the first things you consider when exploring blockchain if you think you might hold value on that network.