The concept behind Deflationary Tokens

in hive-175254 •  3 years ago 

Following the Ethereum Improvement Proposal (EIP 1559 ) the term deflation in the crypto space has become a buzzing word used by crypto enthusiasts deflationary tokens have unlimited supply in the market, making their value constantly fluctuate with little price increase, the crypto space is currently becoming vast with thousands of crypto token launched, tokens with low market cap and high circulation supply barely make it to the top and remain undervalued due to their unlimited supply.


Maintaining a token price and continuously increasing its value will be a driving factor to keep investors attracted to such a project otherwise such a project is bound for quick dumping by both investors and traders.

The economic model of a token is the reason behind some token growth in the market this growth has been achievable with the concept known as deflation.


How deflationary tokens work


Ethereum London fork upgrade had a massive impact on its price value we have experienced a spike in the token price since it's EIP 1559, a point worth noting is that the ethereum token has an infinite market supply circulation the EIP 1559 upgrade made it possible for all transactions fee in ethereum to automatically burn ETH token, these lead a decrease in ethereum token supply generally as token supply decreases it price always increases.

Part of every transaction fee will be burned, or removed from circulation, which will begin to reduce the supply of ether and potentially boost its price.

The above quotation gives a simple explanation of the concept behind the deflationary token in other crypto base project the project team use some reserved percent of the project fund to buy back the said project token and automatically burn the bought token, these burned token are normally locked up, locking the tokens in a wallet without the private keys, rendering them inaccessible.

These show that deflation in crypto is achievable using two concepts buyback and burn and transaction burn as in the case of the ethereum blockchain
The idle idea is a decrease the infinite supply of any mention token.

Final thought


Deflation in crypto as some have argued is a great way to increase a project token value by decreasing the token supply and increasing its demands leading to a price increase, while some are against this idea as they see them as a means of cutting through such project progressive stage the idea is they believe each project should thrive on building incentive use case that will attract investors and not by burning project token supply.

Cardano (ADA) Founder Charles Hoskinson recently disclosed his displeasure on deflationary tokens here expressing the idea as a means of stealing people's food. source

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I think in the practice there are very few really steadilly deflationary tokens. Any more examples?

Generally, there are few list of deflationary token in existence, most crypto project adopt the concept of buyback and burning of their token project with these concepts we can classify these tokens as deflationary tokens like LTC, XRP, BCH, RBS all these token are generally burning their token supply to reduce circulation supply and increase demand.

That is a cool article! I always wodnered why some coins are defletionary and why some are not.

Cardano has a fixed supply so they dont need the deflation, while ETH has an unlimited supply which could fix the price with deflation. I think it depends on the project which is better.

Nice article @mccoy02

Sure, thanks for your time and comment, it depends on a project strategy cardano don't need to implement burn since it has fix supply do appreciate your feedback see you next.