# Token Inflation

DOT is an inflationary token. On the Polkadot network, inflation is set to be 10% annually. Depending on the DOT supply staked and the ideal staking rate (more about this below), part of the DOT inflation is distributed to the stakers and part to the treasury.

DOT went through redenomination in 2020 that saw the DOT token supply increase by 100 times.

The current token supply on Polkadot can be seen here.

It is essential to understand that the primary objective of
DOT inflation is to incentivize network
participants through
Nominated Proof of Stake (NPoS) and to grow the
network through funding the on-chain treasury. There is an opportunity cost of keeping the
DOT tokens idle with the current inflation model
as the tokens get diluted over time. Economics and game theory suggest that setting an ideal
inflation rate is essential for incentivizing the network participants as well as the growth of the
network, and any deviation from it can have adverse effects. Reducing the inflation rate could limit
growth, while increasing the inflation rate could break the incentive model of the token. Hence,
**token inflation rate is not a forever fixed value, and inflation can be updated in the future
through on-chain governance** based on thorough tokenomics research.

## Inflation Model

The chart below shows the inflation model of the network. Depending on the number of staked tokens, the distribution of the inflation to validators and nominators versus the treasury will change dynamically to provide incentives to participate (or not participate) in staking.

There is a dynamic *ideal staking rate* (in the figure set to 0.6 or 60%)
that the network tries to maintain. The inflation model will incentivize network participants to
stake when the *current staking rate* < *ideal staking rate* and disincentivize staking when
*current staking rate* > *ideal staking rate*. The goal is to have the staking rate meet the ideal
staking rate. The current staking rate would be the total amount staked in the current era over the
total token supply, where the total amount staked is the stake of all validators and nominators on
the network. The ideal staking rate accounts for having sufficient backing of
DOT to prevent the possible compromise of
security while keeping the native token liquid.

Source: Research - Web3 Foundation

**x-axis**: Proportion of DOT staked**y-axis**: Annualized percentage (inflation and staking rewards, see below)**Blue line**: Annual inflation rate diverted to NPoS, i.e., the total amount of tokens minted to pay validators and nominators. For instance, 0.1 corresponds to 10% of token inflation diverted to stakers. Since annual token inflation is 10%, all inflation is used to pay validators and nominators, and 0% of token inflation is diverted to the treasury.**Green line**: Annual rewards rate for stakers. For instance, 0.2 corresponds to 20% of annual returns on the staked tokens. You can determine the current annual staking rewards rate by looking at the top bar of the staking overview on the Polkadot Staking Dashboard.

Assuming that the ideal staking rate is 60%, all of the inflation would go to the validators and
nominators if 60% of all DOT are staked. Any
deviation from the 60% - positive or negative - sends the proportional remainder to the treasury.
Deviations from the ideal staking rate are referred to as *staking inefficiencies*. Thus, the
treasury does not receive an inflow of funds from inflation when the system staking rate equals the
ideal staking rate. See this page for more information about
treasury inflow sources.

For those who are interested in knowing more about the design of the inflation model for the network, please see here.

## Ideal Staking Rate

The ideal staking rate can vary between 45% to 75% based on the number of parachains that acquired a lease through an auction (this excludes the System parachains), based on the implementation here.

Briefly, the ideal staking rate can be calculated as follows:

`0.75 - auction_proportion`

where `auction_proportion`

is obtained by computing `min(auctioned_slots, 60) / 300`

. The
`auctioned_slots`

are all the auctioned slots without the slots for system parachains.

Assuming there are 50 filled slots, of which three are dedicated to system parachains (Asset Hub,
Bridge Hub and Collectives), there are 47 auctioned slots. The `auction_proportion`

is thus
`47 / 300 = 0.157`

. The ideal staking rate is `0.75 - 0.157 = 0.593`

.

If the amount of tokens staked goes below 59.3%, then staking rewards for nominators increase, incentivizing them to stake more tokens on the network. On the contrary, staking rewards drop if staked tokens exceed the ideal staking rate. This results from the change in the percentage of staking rewards that go to the Treasury.