What are Inflationary Tokens?

What are Inflationary Tokens

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Inflationary tokens are a type of cryptocurrency designed to have a built-in inflation rate, which means that the token’s total supply increases over time. This contrasts with other cryptocurrencies like Bitcoin, which have a fixed total supply.

Inflationary tokens work because new tokens are periodically created and added to the existing supply, often through “mining” or “staking.” The inflation rate is typically outlined in the token’s white paper or in the blockchain code on which the token is based.

The goal of inflationary tokens is often to incentivize people to hold the token rather than to spend it by providing a steady stream of new tokens. In addition, the inflation rate is used to fund the development and maintenance of the underlying blockchain network and sometimes distribute rewards to holders or validators.

Some examples of inflationary tokens are Ethereum, Cardano, EOS, and Cosmos.

Inflationary Tokens Mechanisms

There are a few different mechanisms that can be used to implement inflation in tokens:

  1. Block rewards: In this mechanism, new tokens are created and distributed to miners or validators (people who perform the computational work that maintains the blockchain network) as a reward for creating new blocks on the blockchain.
  2. Staking rewards: In this mechanism, new tokens are created and distributed to token holders who “stake” their tokens by locking them up for a certain period. This is often used as an alternative to mining and aims to incentivize token holders to contribute to the security and stability of the blockchain network.
  3. Governance incentives: In this mechanism, new tokens are created and distributed to holders who participate in the governance of the blockchain network. This is typically done by voting on proposals or participating in decision-making processes.
  4. Controlled inflation: tokens are emitted through a central entity that controls the rate and supply; this could be a company, foundation, or an open-source community.
  5. Hybrid models: Some projects combine these mechanisms to create new tokens. For example, some blockchain networks use a combination of block rewards and staking rewards to create new tokens.
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Not all inflationary tokens are created equal, and the specifics on how it works, the rate of inflation, and the distribution of the tokens can differ greatly from project to project.

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