Understanding Deflationary Token in Crypto
A pill of knowledge regarding fixed supply tokens, how a cryptocurrency’s deflationary and inflationary mechanism works.
You probably must have heard of these words thrown around. When new cryptocurrencies are created, they can have a so-called hard cap, or maximum supply (the limit set by the blockchain’s code on the absolute maximum number of a given coin). In the absence of a restriction, a token can theoretically be inflationary indefinitely.
What Is a Token?
A token is a digital unit of cryptocurrency that is used to represent a certain asset or use on the blockchain. Tokens can be used for a variety of purposes, the most prevalent of which are security, utility, and governance tokens.
Description of the deflationary process
In a word, deflationary cryptocurrencies are those whose supply in the market is always dropping to a pre-determined and contracted level. The deflationary mechanism for cryptocurrencies is not the same as deflation in the classic economic sense. In current deflationary conditions in traditional markets, you can buy more goods or services for the same amount represented in fiat money after a period — this, of course, is directly tied to the increase in the purchasing power of fiat money.
The basic premise in the case of deflationary cryptocurrencies is to gradually limit the number of available tokens by removing them from the market in a process known as token burning. In essence, such a situation will result in a rise in the value of tokens while lowering their supply. It’s worth noting that burning tokens does not destroy them in the strict sense; rather, it prohibits them from being used in the future. Tokens that have been burned are stored in a special public wallet known as the “eater address.”
Description of the Inflationary process
Inflationary tokens are those that have a net rise in circulation. A net rise indicates that more supply is being introduced than is being removed from circulation (through token burns).
When new cryptocurrencies are created, they can have a so-called hard cap, or maximum supply (the limit set by the blockchain’s code on the absolute maximum number of a given coin). In the absence of a restriction, a token can theoretically be inflationary indefinitely. However, this would call into question the token’s value. To keep a token’s value, many cryptocurrency projects want to reach a deflationary stage as quickly as possible or avoid reaching the hard cap too soon (as this would hurt funding opportunities).
Ethereum is the most well-known cryptocurrency with an infinite supply. some others include Doge, Cake e.t.c
Description of Fixed Supply Token?
Understanding the term ‘supply’
The supply of a particular cryptocurrency refers to the total number of coins in circulation. Three essential terms relate to supply:
- Fixed supply; Fixed (or maximum) supply is the total number of coins that can ever be in circulation.
- Total Supply; Total supply is the number of coins currently mined (including the missing ones that are no longer in circulation or lost).
- Circulating supply; Circulation supply refers to the total number of coins in circulation.
What it Means for Investors to Bank on Fixed Supply.
Investing in a cryptocurrency with a set or limited supply is a good strategy to profit on future value. A price spike is nearly always inevitable when dealing with a cryptocurrency with a finite supply. Investors recognize the significance of strong demand for a limited supply.
Choosing a cryptocurrency with a fixed supply alone does not guarantee you will make a profit. You must also consider the following factors:
- The cryptocurrency should have a rising demand.
- Second, evaluate how long it would take for the cryptocurrency’s supply to run out.
Examples of cryptocurrencies with a fixed supply
Bitcoin (BTC) is the most popular cryptocurrency worldwide. In the past years, Bitcoin has been the go-to option for most investors, primarily due to a dramatic increase in its demand and value.
Cardano (ADA) is a cryptocurrency that powers the peer-reviewed app platform. This crypto-asset, which goes by the ticker-symbol of ADA, has a maximum supply of 45 billion, which is one of the highest.
Quickswap (QUICK) is a decentralized exchange (DEX) based on Ethereum and powered by Polygon’s Layer 2 scaling infrastructure. The native token, $QUICK, has a maximum supply of 1 million and is presently in circulation with 327k.
QuickSwap has all of the popular features of top DEXs, but it also has the missing key components for a completely smooth user experience. Some important features of QuickSwap include:
- Community Governance
- Liquidity Mining
- Yield Farming
- Dual Farming
- Layer 2 Transactions
- Non-custodial trading
This isn’t to say that cryptocurrencies with an indefinite supply are worthless. Ethereum, for example, has no set supply and remains the second-largest cryptocurrency in terms of market capitalization.
The main goal is to see if cryptocurrencies with a hard cap have a better probability of retaining their value than those with an unlimited supply. The ultimate selection should be based on extensive due diligence that considers a variety of criteria other than supply structure.
For More Infomation: