Dilution

What is Dilution?

Dilution occurs when the total supply of a token increases, reducing the relative ownership percentage of existing holders. This typically happens when new tokens are minted and introduced into circulation.

How does Dilution work?

1. A protocol mints new tokens for rewards, ecosystem grants, or investors.
2. The total number of tokens in existence increases.
3. An individual's fixed number of tokens now represents a smaller share of the total.
4. If the market cap remains constant, the price per token decreases as the supply expands.

Why does Dilution matter?

Understanding dilution is crucial for evaluating the long-term value of a token. High dilution can suppress price appreciation even if a project is successful, as the increasing supply offsets the growing demand.

Key features of Dilution

• Increases total circulating supply
• Decreases individual ownership percentage
• Often tied to vesting or emission schedules
• Can lead to "Fully Diluted Valuation" (FDV) concerns
• May be offset by token burns

Examples of Dilution

If a project has 1,000,000 tokens and mints another 1,000,000 tokens for a new staking program, an original holder of 10,000 tokens sees their ownership drop from 1% to 0.5% of the total supply.