In the cryptocurrency market, although most cryptocurrencies share similar underlying technologies, they are designed 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 cryptos come with a decreasing total supply that looks deflationary. Such tokens are known as deflationary cryptos.
We all know that some cryptocurrencies with a fixed supply, like Bitcoin, are generally deflationary by default. Most members of the Bitcoin community reject inflation because it often represents a loss in value. For example, a government-issued real-world currency often controls the entire financial system of the country. If a government frequently issues a large amount of currency through the central bank while setting low interest rates and buying a large amount of foreign bonds, the country will be prone to a credit crunch and worse, an economic depression. .
Before publishing the BTC whitepaper, Satoshi Nakamoto had noted that government-issued real-world currencies are subject to inflation, which inspired him to develop an alternative store of value that is similar to precious metals but achieved digitally. . Bitcoin’s flexible mining difficulty and mining reward mechanisms help you suppress inflation. Meanwhile, Bitcoin’s unique design continues to increase in value. It should be noted that Bitcoin is deflationary not only because of its fixed supply, but also because the block reward is halved every four years.
Deflationary cryptocurrencies like Bitcoin represent not only innovative blockchain architectures and cutting-edge consensus mechanisms, but also a broader experiment in moving long-term deflationary stores of value from the real world into the crypto space.
Typically, the advantage of having a deflationary cryptocurrency lies in the fact that as the total supply and circulating supply decreases, the cryptocurrency will become more valuable and more cryptocurrency users will pay attention to the cryptocurrency and invest in it.
We could make a token deflationary by burning a certain percentage of the supply, buyback and burn some of the tokens, or buyback and hold the tokens. The most common method is manually burning tokens. For example, CET, the platform-based token of global crypto exchange CoinEx, is a token that becomes deflationary through buyback and burning.
According to the CET value agreement, CoinEx will repurchase CET every day with 50% of its trading fee income and burn all repurchased CET at the end of each calendar month until the total supply of CET is reduced to 3K. millions. In the next stage, the exchange will continue to spend 20% of its trading fee revenue 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 about 3.5 billion, according to data on its official website at May 19, 2022. As more tokens are bought back and burned, the CET price has been growing throughout 2021, drawing 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 run, the value of the deflationary tokens will increase as their circulating supply continues to fall, or in other words, the net worth of the deflationary tokens held by their owners will increase.