Dilution
What is dilution?
In short, dilution describes the loss of percentage of market share a holder of a token or coin experiences due to the minting and distribution of new tokens.
The issuance of new tokens is a core mechanic in many protocols, and can come in different forms:
Mining rewards for proof-of-work chains Staking rewards for proof-of-stake chains Staking or similar rewards in DeFi protocols Bonding mechanics of DeFi protocols
Let’s take a look at how this affects holders.
Dilutive example:
You are invested in a protocol with a current token supply of five tokens. Let's assume you own two of those five tokens. You would therefore own 40% of the total token supply.
The protocol then expands its supply and mints an additional five tokens to be given out as staking, mining, or similar rewards, so that the new total token supply is 10.
You still own the same two tokens, but your percentage ownership relative to the total token supply has decreased to 20%
Before: 2 / 5 = 40%
After: 2 / 10 = 20%
Non-dilutive example:
Concave rewards stakers, by giving them $CNV rewards every time the token supply increases due to the Smart Bonding mechanism. Based on our previous example of you holding two out of five available tokens, and assuming you are staking in our non-dilutive pool, you would receive two additional tokens when the supply increases from five to ten tokens. Therefore you will be holding 4 tokens out of 10 total, preserving your initial percentage (20%) of the token supply.
Before: 2 / 5 = 40%
After: 4 / 10 = 40%
image example of non-dilution
Last modified 8mo ago