I don't see how this system is anti-inflationary. As the number of LVL2 coins in the system increases, so the rate of LVL1 coin production increases. As LVL1 coins are now being produced faster, their value decreases. People then burn LVL1 coins at an ever increasing rate, thus producing more LVL2 coins, which in turn increases the rate of LVL1 coin production. How is that not inflationary?
The rate of coin generation has vast diminishing returns. LVL2 coins generate LVL1 at a very slow pace.
If one person burns 1,000 LVL1 coins, that one transaction could be month's worth of LVL2 generation. It may even be deflationary.