All you need to know about Deflationary Digital Currency Tokens
Simply put, digital tokens or currencies can be divided into two main categories: Inflationary and Deflationary. The second category of digital currencies have recently become attractive options for users of the digital currency world due to their nature and protection of investors’ assets against inflation of Fiat currencies such as the dollar and the euro. In this guide about Deflationary Digital Currency Tokens from CoinMarketSIG , we will introduce you to Deflationary tokens.
What are Inflationary Assets and Tokens ?
Many traditional POW (proof of work) and POS (proof of stake) tokens use the structure of an inflationary token economy to encourage miners and liquidators to continue working.
This structure creates a reward system to encourage node operators and miners to approve chain transactions. At the same time, inflation tokens increase the supply time in the token market over time (through rewards to miners, etc.) and reduce the share of token holders.
This scenario can be seen in Bitcoin, where miners receive 25.6 bitcoins as a reward for confirming transactions at the General Office after each block is extracted (every 10 minutes).
Although Bitcoin is a scarce asset with a total supply of 21 million units, it is still an inflationary asset until all of its tokens are in circulation. Another common example of inflationary assets is the US dollar.
The US Federal Reserve can “print” as much of this currency as needed without any restrictions. The key point of inflation tokens is that these tokens are produced and distributed indefinitely and there is no system to reduce their total supply.
What is a Deflationary digital token?
The second model is the Deflationary digital token, in which tokens are removed from the market over time. The process by which tokens are “removed” from the market is called token burning. Now this token burning is done in several different ways, which are discussed in more detail below.
Burning and obsolete tokens in any way will reduce supply and ultimately increase demand, which will certainly have a positive effect on the project price and the digital currency in question.
How does a Deflationary digital currency work?
As mentioned above, Deflationary digital currency uses two methods of burning tokens and burning commissions to be Deflationary, which are discussed in more detail below.
Deflationary through token burning
As mentioned, being Deflationary means burning the tokens in circulation. You may be wondering how blockchains burn their tokens. There is virtually no burning, but the blockchain transfers the tokens from the market to a wallet without private keys, so no one can access them.
Digital currency platforms use two types of burning mechanisms:
- Redemption and burning
- Burn transaction fees
Repurchasing tokens, as the name implies, involves repurchasing tokens from holders by the platform and locking them in an inaccessible address. Platforms may devote some of their profits to implementing this process.
In the second method, the platforms use a smart contract that automatically burns part of the user transaction fee. This mechanism depends entirely on the number of transactions performed on the platform. The more transactions, the more tokens are burned, and vice versa.
In the redemption and burning model, the cryptocurrency control company or entity attempts to redeem the tokens from the market, locking them in an unusable address and burning them.
In this mechanism, with the disappearance of some of the tokens, the supply in circulation decreases and the value of the asset increases because the demand remains constant but the supply decreases. This system is somewhat similar to the annual dividends that some companies distribute among their shareholders.
In both models of token burning, the value of the asset in question increases and the token holders receive more profit. Many people do not know how to burn the supply of tokens for them, yet the important thing to know is that reducing the supply of a cryptocurrency and on the other hand, constant or increased demand for it increases the value of the asset.
This token economy model runs on most Deflationary tokens such as Binance Coin, FTT, and Pancake Swap.
Binance Coin is a native to Binance blockchain token that has multiple functions in Binance platforms. This token has a quarterly redemption and burning mechanism and is one of the largest Deflationary tokens. The burning process will continue until the number of Binance Coin tokens reaches 50% of the total supply, i.e. 100,000,000 tokens.
Deflationary through burning commission
Token economy structures of redemption and burning are usually done manually, while models of burning part of the transaction fee are usually implemented through smart contracts. These Deflationary tokens charge the user a certain amount of tax for each transaction on a chain, a percentage of which is burned.
This system is completely dependent on the volume of tokens, and the higher the volume of transactions, the more tokens are removed from the total supply. This process increases the value of users’ assets by reducing the supply in circulation and the ever-increasing demand for a digital coin.
The benefits of being Deflationary for Digital Currency projects
Deflationary tokens can have several benefits for both investors and projects. Above all, Deflationary tokens seek to address traditional financial issues. Contrary to popular belief, Deflationary tokens have a positive effect on the digital currency environment. Here are some examples of the benefits of Deflationary tokens for projects.
Increasing the value of digital currency
According to one of the main laws of supply and demand, increasing supply leads to decreasing demand. The goal of the makers of Deflationary cryptocurrencies is to reduce the supply of their cryptocurrencies in the market, make it scarce in the market and thus help increase the demand for those cryptocurrencies.
You may ask how this happens. Everyone knows that getting rarer things is more attractive than things that are easily accessible. As a result, investors are more interested in buying rare coins than those in abundance in the market. This trend will increase Coin’s value in the end.
During the recent uptrend, Deflationary tokens attracted the attention of investors. The Deflationary nature of cryptocurrencies is directly to the benefit of investors because they make more profit.
Another lucrative way for these coins is when a platform decides to repurchase the coins from the holders. The whole process that leads to the burning of coin will ultimately benefit coin owners. Token burning eventually increases the value of cryptocurrencies.
Remove extra coins from the market
Unsold tokens in circulation prevent further development of digital currency. The presence of Deflationary mechanisms helps to collect additional coins from the market. In addition, burning the quinces will help correct the mistake if they are distributed incorrectly.
The best Deflationary digital currencies
After paying attention to the nature and how Deflationary digital currency works, some examples of the best of this type of digital currencies are introduced.
The first coin on this list is a controversial cryptocurrency because most people believe that bitcoin is both inflationary and anti-inflationary. Bitcoin is an inflation in that more coins are added to its supply over time through the extraction process, and its deflationary is due to the fact that the miners’ bonus is halved every 4 years.
In addition, the limited maximum supply of bitcoins means that these cryptocurrencies are deflationary. In fact, after extracting all the available bitcoins, there will be only 21 million units of it. Once the entire bitcoin supply enters the market, no new coins will be created and the miners’ rewards will be cut off.
In addition, the loss or forgetting of the wallets ‘private keys and the inaccessibility of individuals’ bitcoins will reduce the supply of these cryptocurrencies.
The native token of the Binance network, the Binance Coin, is also a Deflationary token. In Binance Coin, the redemption and burning approach is used. The Binance team burns a quarter of the coin’s token once in every 3 months.
They achieve this goal by repurchasing Binance Coin from investors who have made more than 20% profit in three months and then sending it to a non-consumable address.
Ripple is another popular digital currency on this list. This cryptocurrency receives a fee for transactions. These fees are not reimbursed to a central institution, nor are they paid as a reward to accreditors, however are burned so that Ripple becomes one of the anti-inflation tokens.
The token cake is native to the pancake swap ecosystem. The cake has no supply limit and this means that it is inflatable, yet in this token, the token burning mechanism is used to control the supply. Cake supply per block (18 tokens) decreases per day (560,400 tokens).
Solana is one of the newest blockchains in the digital currency space. Solana, like Bitcoin, is both inflationary and deflationary.
The distribution of this coin and its unlimited supply show that Solana is inflatable. Nevertheless, burning Solana’s transaction fee makes the cryptocurrency deflationary.
Litecoin is another bitcoin-like coin whose mining bonus is halved every 4 years. This means that the production of new light coins decreases over time and eventually stops when supply reaches 84,000,000 coins.
The native Kevin of the Terra ecosystem called “Luna” is also one of the anti-inflation ciphers. Luna has a maximum supply of one billion tokens, all of which were created at the time of the project’s introduction. As the demand for stable Coins increases, the supply in circulation of these cryptocurrencies decreases over time.
Matic is a native to Polygon network token, which is used for two main purposes: payment of transaction fees and participation in the consensus mechanism of proving shares of the Polygon network. According to the published documents of this project, a percentage of the transaction fee is burned in each block in order to maintain and increase the matrix value.
Safemoon is a deflationary token designed to solve the “farming” reward problem, in which stickers get the highest annual performance percentage while newcomers earn little. In addition to burning manual tokens, Safemoon also uses the method of burning part of the transaction fee. Users must pay 10% of their transaction volume to trade Safemoon. 2.5% of this fee is converted (and burned) by binary coin by smart contract.
More info about Safemoon here : SafeMoon
In general, there are two main types of tokens, including inflation and deflationary tokens. This issue is somewhat complicated, especially in current liquidity extraction models and the distribution of inflation tokens.
The key point to note is that deflationary tokens have a process through which the supply in circulation of tokens is reduced. This process involves the two main mechanisms of burning transaction fees and redemption and burning.
On the other hand, in inflation assets, there are no such mechanisms to reduce the supply of a coin in circulation. It should be noted that although bitcoin is scarce, it is still inflated due to its block rewards.