A crypto asset or coin can be inflationary or deflationary.
In inflationary tokenomics, this means that your token has no maximum supply, and emits at a steady amount per block. Proof of stake coins come with certain inflation baked in (5-15% is a common observation) so that validators and delegators can be incentivized.
Coins like Polkadot dynamically adjust inflation based on staking and participation so that the security of the network can be maintained.
Many DeFi tokens also use inflation to reward liquidity providers and yield farmers on their specific protocols; they have very aggressive inflation schedules to maintain higher annual percentage yields.
However, too much inflation can reduce the value of these coins or tokens already in circulation unless the inflation schedule is extremely aggressive it will not impact short-term prices.
$CAKE is a great example of inflationary tokenomics in DeFi. The inflation keeps your APRs high, but requires careful control to make sure the supply doesn’t get out of hand.
You’ll likely need to manually handle burns (sending tokens to the 0xdead address), or develop some unique method to help manage the supply such as extinction pools from DinoSwap.
While I would label inflationary mechanics as the most common tokenomics method we see in DeFi and especially yield farming, it is also the most advanced.
You need a calculated and active team that is ready to make tough decisions at any time in order to maximize the upside to this method. This method is recommended if you also intend to host many other farms on your platform, as you need higher emissions to do this.
In deflationary tokenomics, your token has a maximum supply, reduced token emissions over time, or both!
A deflationary design of a coin creates a reduction of supply over time, creating a shortage of supply, scarcity value, and hence price increase. Deflationary assets also do not drastically alter the price in the short term and the demand drives longer-term exponential increases.
Deflation of highly adopted crypto assets can make them very valuable e.g., Bitcoin has a total supply of 21 million, with BTC created per block cut in half every four years.
However, at a token and not commodity scale, deflationary mechanics can sometimes be harmful if not executed properly.
For example, if your emissions reduce too much before your farm really gets going, it can negatively affect the APRs and turn off potential new investors who prefer only the most degen of farms. To maximize the upside with this method, try starting with a large, maximum supply, but burn some tokens manually from your developer/team allocation as a first line of defense instead of reducing the emissions should the price go down too quickly.
Deflationary tokenomics is a great overall strategy, and can lend itself to those looking for a more long-term project that don’t intend to have as many pools as PancakeSwap for example. This strategy is recommended should you intend to build on top of your farm with additional strategies such as vaults, stableswaps, or other unique features.
The last method to consider with your farm is utility tokenomics. This means that your token has a clear use case outside of being sold for yield.
For example, if your token is used to earn $KEYS which unlock chests containing NFTs for your play to earn game. If you decide you want to add vaults and become an aggregator, your token may be used for governance and pay a dividend (like $BIFI). In this instance, you’d want to consider a mix of both deflationary and inflationary measures that best compliment your goals.
If you pay a dividend for example, perhaps you’d want to consider reducing the supply over time, so that each holder’s share of the dividend becomes larger. If you want a large governance model that decides which vaults are added, perhaps you do want an infinite supply.
All said and done you’ll want to first decide exactly what you intend to do with your farm, and let that dictate the direction of your tokenomics.
Using a mix of these tactics that fit your needs exactly will offer the best results both early on and once you are more established. No matter what you decide, always listen to the feedback of your community and investors to help guide your decision making process.