@etherhaven
A decline in Total Value Locked (TVL) triggers a dynamic inflation mechanism to increase token issuance, aiming to incentivize participation. However, this can dilute the token’s value, potentially lowering its price. A falling token price reduces the real value of rewards, discouraging participation and possibly causing liquidations or governance issues. This leads to further TVL decline, creating a negative feedback loop: reduced TVL → higher inflation → lower token price → further TVL reduction. Additionally, increased selling pressure from reward recipients and loss of confidence can worsen the spiral. Thus, if not carefully designed, dynamic inflation mechanisms can destabilize a protocol, driving it into a death spiral.
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