What are Inflationary and Deflationary Cryptocurrencies?

[TL;DR]
You must have heard about how the world economy has been affected by inflation or deflation. But did you know that these two concepts are also essential in crypto-economics? The analysis of the long-term price of a cryptocurrency cannot be carried out without its market supply as a crucial determinant. On the other hand, a cryptocurrency with a fixed supply could encounter deflation, while an infinite number of coins could lead to inflation.

There are debates on which one is better in the crypto space. You've most likely heard that crypto can be used to combat inflation, as much as it favours deflation— amongst other stances on inflation and deflation effects on cryptocurrencies. It might seem complicated to catch up with every one of them, but these two concepts are not difficult to understand. You only have to grasp specific terms, and you're good to go.

In this article, we will help you understand the basics of inflation and deflation, the role cryptocurrencies play in both concepts, what inflationary and deflationary assets are all about and what you need to know about these cryptocurrencies to pick the right ones. Let's dig in!


What Is The Difference between Inflation and Deflation?

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Inflation can be defined as an increase in the price of goods and services. With inflation, a currency gradually loses its purchasing power.

Contrary to the myth about inflation, it is not always a harmful effect. It can also stimulate economic growth. But, excessive inflation is not healthy if it's not proportionate to one's salary or leaves space for effective budgeting.

On the other hand, deflation can be defined as a drop in the price of goods and services. A decline in the supply of currency generally leads to deflation.

While the value of the currency rises, it grows even more scarce. A fixed or decreasing supply and steady demand usually cause deflation, making the currency's value grow in price.

The amount and value of money impact both currencies (inflationary and deflationary) in circulation.

Cryptocurrencies can become inflationary or deflationary. When there is an unlimited supply of tokens in circulation, a cryptocurrency is inflationary. Some cryptocurrencies could also become deflationary when they have a fixed number of tokens.

On several occasions, flat currencies fall into the category of inflationary currencies, while most cryptocurrencies tend to be deflationary one way or the other. Regardless, there are no fixed positions as far as cryptocurrencies are concerned.

The critical metrics for determining inflation and deflation in the cryptocurrency include max supply, total supply and circulating supply


Inflationary Cryptocurrencies

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Typically, new tokens are introduced into the network through mining or staking, amongst others. While the supply of the token rises, its value decreases. Over time, this supply increase would lead to a case of using more and more of such tokens to purchase a particular thing.


Examples Of Inflationary Currencies

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There are several inflationary cryptos in the market. Below are instances of inflationary cryptocurrencies you could look up:
1. A hard cap of 100 billion DOGE was eliminated in 2014 to secure an unlimited asset supply. This inflationary move was carried out by one of its creators, Jackson Palmer.

2. Stellar's XLM has a fixed annual interest rate of 1%, which helps to ensure those with access to the coin can constantly receive a decent value of the currency as inflation progresses in the global market.

3. To an extent, Bitcoin is another inflationary asset, with a hard cap of 21 million. At the time of this writing, only 19,057,106 BTC are in circulation. Through the mining process, Tokens are added to the market supply. Once Bitcoin reaches the threshold of 21 million dollars, it will become a deflationary cryptocurrency.

In the meantime, there are disinflationary measures that stall the inflation rate from time to time. The major one, named "halving", cuts the amount of Bitcoin entering circulation or received from mining every four years.

Although 19 million bitcoins have already been mined, the network is not estimated to reach an extreme point until the next century. Thanks to the slow drop in mining rewards.

The mining reward was 12.50 bitcoins in 2016. Later on, it declined to 6.25 in 2020 and will supposedly fall to 3.125 in 2024.


Deflationary Cryptocurrencies

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Deflationary cryptocurrencies are cryptocurrencies with a limited supply in circulation. Since the smart contracts of cryptocurrencies generally determine their maximum supply, the possibility of exceeding their limit hardly occurs. Nevertheless, the supply of some cryptocurrencies can be deflated after some time.

If these cryptocurrencies do not naturally recover (high demand), their prices reduce to a dip till they reach their limit. Once they reach their limit, their supply comes to a halt.

Deflationary cryptos can be worthwhile investments because they are resistant to inflation surges.


List Of Deflationary Cryptocurrencies

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Many cryptocurrencies work like central banks but still make it to the deflationary list. They employ necessary measures to preserve the value and put it in check. Below is a list of deflationary cryptocurrencies:

1. A clear example of a deflationary cryptocurrency is BNB. Each quarter, BNB is destroyed to lower its supply until the token's supply hits 100 million BNB.

2. Before anything, you should know that Bitcoin is both an inflationary and deflationary cryptocurrency. It is deflationary because miners' rewards are halved every four years.

3. The Terra USD stablecoin is an example of such a cryptocurrency. Its network mints and burns tokens, stabilising its price at $1.

4. Similarly, Ether, Ethereum's native token, was once inflationary. However, an update in August 2021 required some coins to be burned when the network activity rises to make it deflationary. Out of $4.5 billion, more than 1.7 million ether coins worth upwards have been burned.

5. Ripple also has a unique way of maintaining its deflationary token (XRP). At first, about 100 billion XRP was released. In 2017, 55 million of these coins were locked away. They are released periodically to raise the circulating supply and maintain liquidity.

Additionally, you pay a transaction fee every time you make a transaction using XRP. This fee is then burned to strengthen the coin's deflationary nature.

6. PancakeSwap's CAKE lacks maximum supply, yet it applies the coin burn approach to manage its supply consistently. Its market supply is reduced daily by -500,400 and by block at -18.

7. In every block, a percentage of each Polygon's transaction fee is burned to provide continuous support for MATIC's coin value.

8. This crypto asset, SAFEMOON, charges a 10% fee per transaction and sells 2.5% of this charge into BNB (for burning).

9. Just like Bitcoin, Solana's SOL is an inflationary and deflationary coin. Its deflationary feature exists due to its transaction fees.

10. Following its reduction to 101,673,029,723, Tron's TRX moved from inflationary to deflationary coin in April 2021.

Other deflationary cryptocurrencies include Ethereum Classic (ETC), Bomb (BOMB), Tenset (10SET), Filecoin (FIL), and Nuke (NUKE).


Methods of Deflating Cryptocurrencies

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There are two standard methods utilised for removing coins from the market.

Buyback-and-Burn
With this method, a company purchases a substantial number of its coins from the market and burns them by sending the cryptocurrencies to a dead address. This procedure destroys the crypto assets and, in turn, abolishes the circulating supply of that cryptocurrency. Besides BNB, other deflationary cryptocurrencies like FTT and CAKE use this method.

Burn On Transactions
Here, the cryptocurrency's contract explicitly indicates that the quota of taxes collected from on-chain transactions will be burned. The success of this method heavily depends on the trading volume. Deduction only takes place when transactions happen. BNB, SAFEMOOD and HyperJump are the top crypto assets applying this method.


Conclusion

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Inflationary and deflationary currencies are strictly tied to the traditional economic setups of inflation and deflation. The value of an inflationary or deflationary cryptocurrency relies on the percentage of its supply.

Unlike the conventional economic setups where higher inflation rates can diminish the currency's value, the crypto space is constantly evolving. Unlimited market supply can easily be accounted for, where the market cap advances consistently and their cryptocurrency becomes deflationary.






Author: Gate.io Observer: M. Olatunji
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