Polkadot’s inflation mechanism has always been a critical part of its network design, but as the market evolves and the ecosystem grows, adjustments to the inflation rate have become a focal point for the community. Recently, the Polkadot community passed and implemented the WFC (Wish For Change) proposal #1139, reducing DOT’s inflation rate from 10% to 8%. This change not only optimizes the Polkadot tokenomics but also creates new growth opportunities for its DeFi ecosystem.
Adjustment to Polkadot’s Inflation Mechanism
Polkadot’s inflation mechanism has always aimed to incentivize stakers to ensure network security while providing funding for the treasury. Previously, Polkadot’s inflation rate was 10%, with most of it allocated as rewards to stakers and validators, while the remainder flowed into the treasury.
Proposal #1139 proposed reducing the inflation rate to 8% and gradually lowering it further in the future, aiming to lessen the dilution impact of inflation on DOT holders while optimizing the network’s economic model. The reform also includes allocating 15% of fixed inflation revenue to the treasury, ensuring a sustainable source of funding for network development. This decrease in inflation not only reduces direct returns for stakers but also compels holders to seek other high-yield opportunities, thereby unlocking new growth potential for the DeFi.
Impact of Lower Inflation on Polkadot’s DeFi Ecosystem
The reduction in the inflation rate from 10% to 8%, with further gradual reductions planned, will have profound effects on staking yields, treasury inflows, and the broader DeFi ecosystem within Polkadot, particularly in the Liquid Staking Token (LST) sector.
Currently, while Polkadot’s staking rate is high, the penetration rate of LST remains relatively low. According to statistics, the total staked DOT amounts to 871 million, but the leading protocol in the LST sector, Bifrost, accounts for less than 1.5% of this amount.
This implies that as the inflation rate decreases, users may be more inclined to seek additional yield opportunities through LST products. The reduction in inflation will create a “crowding-out effect,” where users, in an effort to compensate for reduced staking rewards, may turn to liquid staking protocols like Bifrost to explore more diversified yield scenarios.
At the same time, other DeFi projects within the Polkadot ecosystem are also likely to benefit from this adjustment. Through assets like vDOT, users can engage in cross-chain applications across multiple protocols, enhancing liquidity and capital efficiency. In the future, as LST penetration increases, the LSTFi sector within Polkadot may see more innovative opportunities emerge.
Bifrost: Leading Liquid Staking Protocol in the Polkadot Ecosystem
Bifrost is the leading liquid staking protocol in the Polkadot ecosystem, offering liquidity tokens such as vDOT. Users can stake DOT to receive vDOT, which can then be utilized across various DeFi scenarios, including lending, trading, and leveraged staking—for instance, using vDOT as collateral on Interlay to borrow iBTC.
Bifrost enables users to unlock the liquidity of staked assets, allowing them to earn staking rewards while simultaneously utilizing these tokens in DeFi protocols. vDOT provides users with base staking yields, with the current APR for vDOT at approximately 16.42%. Additionally, Bifrost has introduced leveraged staking through its Loop Stake product, further amplifying users’ potential returns. By combining staking rewards with opportunities for DeFi participation, Bifrost has attracted a significant user base.
On the data front, since the passage of the inflation adjustment proposal, market demand for Bifrost’s vDOT has seen a noticeable increase. According to DefiLlama, the Total Value Locked (TVL) of vDOT grew by approximately 12.5% following the proposal’s approval, and the number of users has also shown a significant uptick. This data reflects growing user interest in liquid staking products, especially against the backdrop of reduced staking rewards, with Bifrost’s compounded yield model drawing more participants.
Notably, Bifrost is currently running the Liquid Wave campaign, where staking DOT into vDOT allows users to share in BNC rewards, with a current compounded APR of over 40%. Additionally, depositing vDOT into Hydration’s single-sided liquidity pool offers an extra 8% APR, bringing the overall staking yield to 50%.
Furthermore, vDOT retains DOT governance rights, allowing users to directly participate in Polkadot OpenGov governance using their vDOT.
Summary
In the short term, the reduction in Polkadot’s inflation rate directly lowers the staking rewards for native staking, but it also encourages more users to turn to DeFi protocols in search of higher returns. Protocols like Bifrost, Hydration, Stellaswap, and Acala provide users with more flexible yield opportunities, promoting the adoption and application of Liquid Staking Tokens (LST).
Overall, as inflation decreases, Polkadot’s DeFi ecosystem is experiencing a trend of capital inflow and user growth. The adoption of LST is breathing new life into DeFi protocols, effectively allocating more capital across different DeFi scenarios and enhancing users’ yield experiences.
In the future, as inflation is further reduced, Polkadot’s DeFi ecosystem is likely to see even greater development, driving the entire network towards a more diverse and prosperous future.
