Inflationary Vs. Deflationary Cryptocurrencies
In this article, we will take you through the definitions of inflation and deflation, and then explore the wonderful but ever-changing world of inflationary/deflationary cryptocurrencies.
What does inflationary/deflationary mean?
In economic terms, inflation refers to the decline of purchasing power over time. This means with the same amount of money, you can buy less than you could before. Contrasted to inflation, deflation refers to the increase of purchasing power and buying more with that same amount of money. Inflation and deflation are closely related to the money supply, i.e., the amount of cash or currency in circulation, as well as the production output in the economy.
Things are the same - pretty much - in the world of crypto. We say a cryptocurrency is inflationary/deflationary when the number of coins or tokens in circulation is increasing/decreasing over time. This can be influenced by a number of factors, such as hard cap, mining, burning, etc.
Hard cap is the maximum supply of a cryptocurrency. Bitcoin, for example, has a hard cap of 21 million BTCs. Ethereum, on the other hand, has no hard cap. Hard caps, or lack thereof, are usually declared in whitepapers prior to issuing and releasing tokens.
Mining should be no stranger to you, even if you’re not burying your head in the world of crypto every day. This painstaking, arduous process involves solving complex mathematical equations and getting rewards in cryptocurrency. These rewards are tokens that have just been discovered (mined) and added into circulation by the miners.
Burning is leveraged by most deflationary cryptocurrencies to reduce their token supply. In practice, burning means sending tokens to a non-existent or wrong address. Since no one has access to such addresses, these tokens are effectively put out of circulation. Tokens may also be ‘unintentionally’ burned when some of the hodlers accidentally lose their seed phrases or lose their hardware ledgers, putting their own tokens out of circulation.
Which cryptocurrencies are inflationary?
At the moment, the chief of the crypto tribe - Bitcoin - is technically inflationary. Miners have been introducing new BTCs into circulation since the very beginning. This will change when the hard cap - 21 million BTCs - is reached, although we may not be expecting it in at least a century. By then, the total BTCs in circulation will stay the same and may even decline.
ETH also used to be inflationary, as there was no hard cap on its total supply. With the introduction of EIP-1559, which burns all ETH in a transaction’s base fee, ETH became deflationary because its total supply will be reduced over time.
DOGE, the earliest meme coin, has an infinite supply since its founder removed its hard cap in February 2014 and is therefore inflationary.
Which cryptocurrencies are deflationary?
As mentioned above, BTC and ETH can both be deflationary at some point. Another prime example is Polygon’s native token, MATIC, which will be burned in each transaction to reduce its supply.
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The centralised crypto giant - XRP - is also deflationary due to its fee-burning mechanic. The reality, however, is a different matter entirely. Ripple placed 55 billion XRP in escrow back in December 2017 and has been releasing them monthly at a slightly faster rate, increasing XRP’s supply and rendering it inflationary.
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Inflationary/deflationary is a state of mind
You may have noticed that almost no cryptocurrency is decidedly inflationary or deflationary. Tokenomics may be adjusted at any time like monetary policies. One protocol implementation will throw a cryptocurrency from the inflationary gang to the opposite overnight. Also, dencentralised autonomous organisations (DAOs) may adjust the rate of inflation by voting on different proposals regarding minting, staking, vesting, etc.
Blockchain technology is always evolving. Inflationary/deflationary, and almost all properties of a cryptocurrency, is in a fluid state. Learning these properties (and how they may be changed) is essential for every crypto investor. Here at Bitget, we offer not only a wide variety of inflationary/deflationary coins for trading, but also a comfortable amount of knowledge to keep you up with the latest news & trends.
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Disclaimer: All products and projects listed in this article are not endorsements and are provided for informational purposes only.
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