What is inflationary cryptocurrency
Some cryptocurrencies are inflationary because their supply grows over time. Such cryptocurrencies use a combination of predetermined inflation levels, supply constraints, and token distribution mechanisms to maintain supply and motivate participation in the network.
Most cryptocurrencies have different mechanisms for creating and offering coins due to their specific monetary structure and, in particular, their issuance.
In inflationary coins the supply is constantly growing due to the fact that new tokens are constantly entering the market.
Usually, the inflation rate is determined in advance, so it is immediately clear by what percentage the total supply will increase over time;
Moreover, the maximum supply of inflation tokens, usually fixed or variable, sets the total number of tokens that can be produced.
The moment the maximum supply is reached, no new token will be reproduced again (at least within the current system).
Nevertheless, different cryptocurrencies have different “tokenomics” that can be adjusted over time.
For example, the initial maximum supply of DOGE was 100 billion units. In 2014, this restriction was lifted. Since then, the supply of DOGE tokens has been unlimited.
How does inflationary cryptocurrency work?
Usually new coins are distributed among the network members using special consensus mechanisms, such as Proof-of-Work (PoW) and Proof-of-Stake (PoS).
With their help new coins can either be issued to the market (like in the Bitcoin system) or distributed to the network’s validators (like in the Etherium system).
With the consensus mechanism used in Bitcoin, the miners validate the transactions and their reward is& based on;solving a mathematical problem (finding the unique value).
Whoever is the first to meet the necessary conditions will receive the reward. In PoS transactions are confirmed by validators who check the necessary information.
The validator checks if the transactions in the block are correct. If everything is correct, the validator adds the block to the blockchain and gets rewarded for work in ethers.
Usually its size is proportional to the size of the deposit (steak) of the validator.
In some cryptocurrencies, the distribution of new tokens can be influenced by management decisions.
For example, decentralized autonomous organizations (DAOs) can vote to change monetary policy, reward staking, and set vesting periods, which will ultimately affect currency inflation rates and the distribution of new tokens.
What is deflationary cryptocurrency
The supply of deflationary cryptocurrencies decreases with time. Various mechanisms are used to reduce the number of tokens in circulation: usually they are destroyed with incineration or transaction commissions.
Deflationary cryptocurrencies have a predetermined level of deflation, encrypted in protocol. This level determines the percentage of decrease in the total supply of cryptocurrency in time.
For example, the cryptocurrency may have a deflationary level of 2.5% per annum. This means that its supply will decline by 2.5% annually.
Like many inflationary cryptocurrencies, deflationary cryptocurrencies can have a fixed or variable maximum supply that limits the total number of tokens issued.
In general, no token can be released after reaching the upper limit of the total supply. But there are exceptions.
Interestingly, the economics of deflationary cryptocurrencies are influenced by the motives of stakeholders, including miners, developers and users.
Everyone has different motivations and goals that affect the supply of cryptocurrency and demand.
Miners mine new coins. Many of them prefer to hold on coins in hands during certain fluctuations on the market, instead of selling in the moment.
Similarly, it is possible to remove restrictions from the general offer, as it was done with DOGE. Examples like this show that some cryptocurrencies can be manipulated.
How does deflationary cryptocurrency work? It can have a direct or indirect mechanism to “destroy coins” in circulation.
Some deflationary cryptocurrencies may use transaction fees to help the combustion process and reduce the total amount in circulation.
“Burning coins can also involve sending a certain amount of coins to an unreachable address, taking the coins out of circulation directly;
The same BNB uses two mechanisms to burn coins, reducing the supply by 50% over time. First -burning a portion of the BNB spent in commissions on the BNB Chain. The second is just regular, quarterly token burning.
Deflationary cryptocurrencies use other tools to reduce supply, including halving. Halving every four years reduces the reward for bitcoin miners, gradually increasing the shortage of the asset.
What’s the difference between inflationary and deflationary cryptocurrencies
Inflationary and deflationary cryptocurrencies differ in the monetary mechanism used and supply dynamics.
These differences have a serious impact on the use and value of each type of cryptocurrency.
Both inflationary and deflationary cryptocurrencies may have unique tokenomics that will have some effect on price and usage.
Deflationary coins usually have a limited supply, resulting in an increase in purchasing power in the long term.
Inflationary cryptocurrencies traditionally have a flexible system of producing coins, which leads to decreasing purchasing power over time.
Inflationary coins have some advantages over deflationary coins. They encourage spending and do not encourage saving.
Depending on;the;situation,can allow liquidity&and quick& introduction, the use as& a& means& of exchange.
In addition, such assets offer a more flexible monetary policy than deflationary cryptocurrencies and some fiat currencies.
Token inflation can be tailored to the needs of the ecosystem, such as: fund development, encouraging participation, and countering inflationary pressures from the fiat money system.
Deflationary coins encourage hoarding and reduce the desire to spend, increasing the scarcity of cryptocurrency and recognizing it as a source of value preservation..
Reducing the supply of tokens will help counter inflationary pressures caused by external factors, including government policies and economic developments.
Simply put – inflation coins are more of a medium of equivalent exchange and an asset capable of performing the function of money.
On the other hand, deflationary coins are a means of saving and an investment (as well as speculative) asset..
Such dynamics can be explained by means of the old Copernican law (also known as “Gresham’s Law”), namely, “The Worst Money Replaces the Best: “The worst money drives the best money out of circulation.”
Bitcoin
The classification of bitcoin as a deflationary or inflationary coin depends on a number of factors.
BTC is an inflationary coin because new coins are constantly being issued and replenish the supply. On the other hand, anti-inflationary measures like halving, reduce inflation over time.
The argument in favor of bitcoin being a deflationary cryptocurrency is limited supply and the same halving.
Halving reduces the reward for miners, affecting the bitcoin deficit and reducing depreciation over time.
While the rewards for mining continue to fall over time, the process of mining BTCs has become incredibly complex and expensive.
The offer of 21 million means that once all tokens will be released to the end – and no more will be able to increase..
As soon as the year 2140 comes, the inflationary component of BTC will disappear, because there will be no “minting of new coins”.
While while mass&adoption&and demand for bitcoin continue& to grow, its internal deflationary mechanism ensures the process of long-term rate growth.
For the same reason, many experts are convinced that Bitcoin will remain protective against inflation due to its internal mechanism;
Etherium
What is the nature of Etherium: deflationary or inflationary -the question is debatable. All those who consider ETH an inflationary asset argue that there is no strict supply constraint.
On the other hand, the software restriction of token creation, the move to PoS, and the growing applicability of ether in the decentralized finance (DeFi) ecosystem speak to the deflationary nature of ETH.
The Etherium ecosystem helps the development of decentralized applications (DApps). Its native currency Ether is used in transactions as a reward for validators.
The supply of ethers is unlimited, but the level of new coin creation is& designed to decrease over time.
In times prior to the Merge update, the ETH issuance rate was typically around 5%. In other words, the supply of cryptocurrency increased by 5% annually.
The move to PoS has reduced the issuance of ether through awards to validators, likely making it a deflationary asset.
Since the Etherium ecosystem uses PoS, validators must stack their tokens as collateral.
The more ether locked up on the net, the less of it is available for trading, which can lead to an increase in price over time.
Moreover, those who believe that ether is a deflationary cryptocurrency can cite the increasing use and mass acceptance of.
The more developers release Dapps on Etherium, the greater the demand and the higher the value.
Moreover, as the Etherium platform continues to be used for DeFi-applications, the demand for ETH for payments may also increase, which could lead to price increases.
Examples of deflationary coins
To summarize, in the case of many modern cryptocurrencies, their categorization as “inflationary” or “deflationary” is not always unambiguous.
This very nature depends on various factors, including the time interval of cryptocurrency existence, its distribution and application, possible updates and so on;
For example, Bitcoin is rather deflationary due to a strictly limited maximum supply of coins.
People are able to forget cryptocurrency wallet passwords, which means that the actual volume of coins in circulation will be even less than the claimed 21 million koins.
At the same time, the issue (generation) of new coins will continue tentatively only until 2140.
In view of this to conditionally deflationary coins we can include a common cryptocurrency, whose monetary model resembles (or even repeats) Bitcoin.
Litecoin, Bitcoin Cash, Bitcoin gold, Zcash, Dash and many others.
The conditionally deflationary coins can also include those that have a maximum limit on issuance over time, albeit a much higher threshold than the same BTC.
It is important to remember that the “deflationality” of these coins is possible only if demand remains constant.
These may be cryptocurrencies within their own ecosystems that compete with the Etherium (for example, the same Avalanche (AVAX)), whose limit issue is limited to 720 million units.
They can also be highly specialized cryptocurrencies with a single issue at the time of the project launch;
For example, Ripple (XRP), the issue of which was 100 billion. Algorand (Algo) is a similar coin.
Finally, we can also include the cartoonishly huge, but nevertheless fixed issue of cryptocurrencies like Shiba Inu (SHIB), a memcoin with an issue limit of 1 quadrillion (!) units (not including combustion).
At the same time, the “deflationality” of this coin does not guarantee its possible “depreciation” in the future due to lower demand.
Examples of inflationary coins
While the Etherium model is controversial in terms of inflation, there are other cryptocurrencies with an ecosystem that would make them inflationary with some qualification, such as Solana (SOL).
In some cases, as with Polcadot (DOT), the developers themselves declare that their coin is inflationary, and potentially unrestricted.
Other developers are making similar claims, such as Mina.
Inflationary cryptocurrency can include so-called stabelcoins, such as Tether (USDT), USD Coin and others.
In this case, they are, first, secured by fiat (paper and state) currency, which due to its nature is subject to inflation.
Consequently, the digital coin backed by it will, by definition, follow the price of the asset.
For this reason, Binance USD (BUSD) and Gemini dollar (GUSD) can be referred to inflationary stablenecoins.
The issuance and monetary policy of such Coins in general is very different from that of a “traditional cryptocurrency” like Bitcoin.
Some anonymous coins with unlimited issue like Monero (XMR), projects like GateToken (GT) and some meme-coins like Dogecoin (DOGE) can also be referred to inflationary.