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The Boom in Deflationary Token – What You Need to Know
The crypto space is rapidly expanding and in-comes different token models with additional features leveraging varied mechanisms. Tokens in the crypto space are categorized into either inflationary or deflationary tokens. An inflationary token employs a unique model where tokens are added to the market after a specified period.
A well-demonstrated example of an inflationary token is Bitcoin, which is released 12.5 new coins every 10 minutes to reward miners for mining the next block. However, not all inflationary tokens are issued via mining. For instance, the company issued Ripple (XRP), which gradually sells them off to fund operations.
Deflationary tokens take a novel approach where tokens are eliminated from the market and “Burned” after a given period. As a result, several mechanisms are removed from the market, such as buying back and token burns from the issuer. The primary benefit of deflationary tokens is that they grow in value as they get burned and staked in a pool to raise their capital and ensure liquidity.
Some concerns eliminating excess tokens make deflationary tokens less available and consequently decreases the token’s actual supply. However, this is not the case with deflationary tokens since they can be divided by 100 millionths. Thus can never be short of supply.
Nonetheless, deflationary tokens have since come under fire from regulators such as U.S. Securities and Exchange Commission (SEC) as they are often viewed as security. The main issue is that the deflationary mechanism used to purchase market tokens generally depends on a company’s success. If a company is quite successful, it can buy more tokens from the market, reducing the supply and making the token much more successful.
On the other hand, if the company performs poorly, it will fail to buy the token’s excess supply leading to a non-functional ecosystem. Therefore, deflationary tokens are often viewed as security due to the heavy link between their success and the ecosystem’s circulation. There are over 20 deflationary tokens in the crypto space, with burn rates ranging from as low as 0.1% to as high as 90%. This guide will look at the top four deflationary tokens, their mechanism, and the technology behind them.
Bottom Line
Deflationary tokens have become quite prominent in the crypto space. It’s based on reducing the supply on each transaction to increase scarcity and consequently enhance the token’s price in circulation. Deflationary tokens have been mainly compared to stablecoins but have better capabilities to combat volatility and inflation in the crypto space.
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There is no doubt that deflationary tokens provide a new frontier in the crypto sector attributed to the burning practice, which stabilizes tokens or crypto market value, in turn, building a sense of confidence in investors to hold on to their tokens for long. Therefore, in the future, we are expected to see more deflationary tokens launched in the crypto space, accompanied by increased blockchain adoption.
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