Approximately 18,000 coins are now in circulation, with more on the way. The market capitalization of cryptocurrencies has crossed $2 trillion and is expected to continue to increase. As a result, it’s vital to understand that certain of the market’s currencies’ economic models are the driving force behind their ascent.
Approximately 18,000 coins are now in circulation, with more on the way. The market capitalization of cryptocurrencies has crossed $2 trillion and is expected to continue to increase. As a result, it’s vital to understand that certain of the market’s currencies’ economic models are the driving force behind their ascent.
There are two basic types of tokens in the crypto market: Inflationary and Deflationary.
What is an Inflationary Token?
Inflationary token have no limit to how many units are in circulation. The supply of inflationary tokens becomes greater than the demand over time. As a result, the tokens start to lose their value with supply and demand discrepancies.
It is important to understand that unlimited token/coin supply is very new technologically compared to fiat currency.
That is not to say that unlimited token supply and managed inflation is not viable, but at this early stage, limited token supply has less volatility in a market that is still learning.
What is a Deflationary Token?
Deflationary token have a max supply. The ****value of deflationary token increases with time, as the currency becomes ever more scarce.
Bitcoin, the first and the largest cryptocurrency, will only ever spawn 21 million coins. After this pool runs dry, there will be no more new bitcoins. In fact, most of the coins (over 18 million as of writing this article) have already been mined. Since the mining reward is growing smaller and smaller, bitcoin can already be seen as deflationary. When this limit is reached, it will become truly deflationary. Cryptocurrencies such as Litecoin and Bitcoin Cash has a similar limit.
Due to its deflationary nature, there may come a time when people HODL crypto relentlessly. Purchasing it might become an arduous and expensive task. For now, the easiest way to purchase crypto is to buy it for fiat at an exchange
How Do Deflationary Tokens Work?
Deflation in cryptocurrencies mainly involves burning tokens from circulation. The confusion comes in how exactly a blockchain destroys its tokens. It is not a literal activity as it consists in locking the tokens in a wallet without the private keys, rendering them inaccessible.
Platforms employ two types of burning mechanisms: buyback and burn and transaction burning. Buyback is a self-explanatory mechanism as it involves the platform buying back tokens from holders and locking them in an inaccessible address; a platform may use part of its profits to execute this process.
Binance Coin or BNB is an example of a deflationary token with a buyback and burn model. The company burns a 1% supply of BNB every four months. This makes the coin scarce and drives up its value.
As for burning on transactions, a platform employs a smart contract that automatically burns part of transaction fees. This mechanism heavily depends on the number of transactions on a platform; the more the transactions, the more tokens the platform burns and vice versa.
After the London Upgrade, the Ethereum network has become deflationary in nature with a ‘Burn on Transaction’ model. Every time a transaction is confirmed on the network, a portion of its fee is burned.
INFLATIONARY VS. DEFLATIONARY ESSENTIALS
Let’s look at some of the comparisons:
| Inflationary | Deflationary |
|---|---|
| The more units there are in circulation, the more likely it is that they are worth less. | Fixed or decreasing supply and steady demand usually makes them grow in price. |
| New units of fiat can be made at any time, which makes it inherently inflationary. | They are inherently deflationary as they cannot be made at whim. |
Conclusion
We do not rule out unlimited token supply as a future economic model. For now, in this stage of this new technology, limited token supply is a much safer buy because its value hinges on the products and services that are offered.
Do your own research before investing in a token.