In the cryptocurrency market, although most cryptocurrencies use similar underlying technologies, they are developed based on different economic models, known as tokenomics. To be more specific, some cryptocurrencies have a supply that increases over time, while others have a fixed supply. However, a minority of crypto assets come with a declining overall supply that looks deflationary. Such tokens are called deflationary crypto.
We all know that some fixed supply cryptocurrencies like bitcoin are usually deflationary by default. Most members of the bitcoin community reject inflation because it often represents a loss of value. For example, real currency issued by a government often controls the entire financial system of a country. If the government frequently issues large amounts of currency through the central bank, setting low interest rates and buying huge amounts of foreign bonds, the country will be exposed to a credit crunch and, worse, an economic depression.
Prior to the publication of the BTC whitepaper, Satoshi Nakamoto noticed that real-world government-issued currencies were subject to inflation, which inspired him to develop an alternative store of value similar to precious metals but digitally traded. Bitcoin’s flexible mining difficulty and mining reward mechanisms help it keep inflation down. Meanwhile, Bitcoin’s unique design continues to drive up its value. It should be noted that bitcoin is deflationary not only because of its fixed supply, but also because the block reward is halved approximately every four years.
Deflationary cryptocurrencies like Bitcoin represent not only innovative blockchain architectures and advanced consensus mechanisms, but also a broader experiment in moving deflationary long-term savings from the real world to the crypto space.
Usually, the advantage of having a deflationary cryptocurrency is that as the total supply and circulating supply decrease, the cryptocurrency becomes more valuable and more users pay attention to and invest in the cryptocurrency.
We could make the token deflationary by burning a certain percentage of the supply, buying back and burning some tokens, or buying back and holding tokens. The most common method is manually burning tokens. For example, CET, a token based on the CoinEx global crypto exchange platform, is a token that becomes deflationary through buybacks and burns.
Under the CET Value Agreement, CoinEx will buy back CET every day for 50% of its trading fee income and burn all redeemed CET at the end of each calendar month until the total supply of CET drops to 3 billion. In the next phase, the exchange will continue to spend 20% of its trading fee income on buying back and burning CET until the remaining CET is completely burned.
The total supply of CET is 10 billion, and through continuous efforts, CoinEx has bought back and burned about 6.3 billion CET, and the current total supply is approximately 3.5 billion, according to its official website as of May 19, 2022. As more tokens were bought back and burned, the price of CET rose throughout 2021, which caught the attention of many cryptocurrency users. As CoinEx continues to buy back and burn CET, the circulating supply of this deflationary token will continue to fall, and the value of CET as an ecosystem-based token will also rise over time.
Generally speaking, cryptocurrency users prefer deflationary tokens. In the long term, the value of deflationary tokens will increase as their supply in circulation continues to fall, or in other words, the net worth of deflationary tokens held by their holders will increase.
Credit : www.newsbtc.com