Proof-of-stake and the Cantillon effect
The fixed income analogy used to model staking cash flows, or issuance in flows models, is flawed. New issuance is internal, available to all token holders, nearly without cost, and has a low barrier to entry. As a result, proof-of-stake demonstrates a much smaller Cantillon Effect compared to proof-of-work.
Rather than analyzing staking rewards in an inflationary environment (before token burning), one should recognize that staked ether are guaranteed to be deflationary and to increase the staker’s share of the token supply. With all the deflationary effects combined, staked ether tokens will initially see a total ether supply deflation rate in the low-teens.
The objective of this writing isn’t to discuss whether the Cantillon Effect is a real phenomenon, but instead to use it as a starting point and framework to discuss different forms of inflationary dynamics and why some can be more problematic than others.
Estimated reading time: 14 minutes