A cryptocurrency with a continuously depreciating supply in its blockchain is called a deflationary cryptocurrency. Deflation can be accomplished through burning some percentage of a coin being minted, buyback and burn, buyback and hold, and many more.
Cryptocurrencies such as Bitcoin that are known to have fixed supplies are deflationary by default. It provides some unique understanding of the dynamics of inflation versus deflation.
In recent history, Inflationary, government-issued currencies have overseen the entire financial system, but that wasn’t often the case, and its implications are crucial to recognizing.
In this article, we’ll discuss about deflationary cryptocurrencies, such as Bitcoin. We’ll learn what they are and the benefits of using them.
How Do Deflationary Cryptocurrencies Work?
An inflationary model is what the United States Capital market operates. In this model, money is deliberately printed into the system every year, and Central banks have the authority to devalue money or increase the money supply.
The principle of this model is that when your money is devalued, you’re likely to spend it faster instead of saving for later.
It is the situation for an economy with free-flowing cash (a spending economy) as it enables the spending of cash. But this isn’t how a deflationary model like Bitcoin’s work. You are totally in control of your funds in the case of deflationary cryptocurrency, and money printed is in fixed supply.
With Bitcoin, for example, the flexible mining difficulty and halving events guarantee a deflationary characteristic to its network.
It keeps inflation in check, and by design, the value of bitcoin continually increases. For instance, if you buy an item today for “X” amount of BTC, in the future, you will buy the same item for a lesser amount because of how the deflationary model works.
Bitcoin is deflationary not only because it has a fixed supply but approximately every four years its mining rewards(issuance) reduces in half by 210,000 blocks.
Satoshi noticed the difficulties of inflation that the government-backed currencies caused and aimed at developing an alternative form of storage similar to precious metals but in the new digital format.
Bitcoin and other deflationary cryptocurrencies like Burny, do not only represent new and innovative technology in blockchain architecture and consensus mechanism, but they are a wider experiment for transferring deflationary long-term value storage to the digital world instead of the physical ( precious metals and gems).
Advantages of Deflationary Cryptocurrencies
Deflationary cryptocurrencies present numerous benefits to users and crypto companies which include:
1. It enables companies to avoid circulating unsold coins to the market:
Deflationary cryptocurrencies are not affected by the market volatility, therefore, they won’t devalue in price, and investors who took part in ICO’s will not be affected.
2. Maximizes the profit
In the instance where a specific cryptocurrency is used to share the profit of the company made, if the company holds smaller portion of coins therefore earning lesser revenue, the company may agree to begin buying their coin on various exchanges and hold them so as to boost their earnings from the profit made by the company.
3. To increase the valuation of the coin
Where a company is looking to entice more investors to invest in their coin, they may agree to buy back the coin by using a particular percentage of profit made and burn them to an address with inaccessible private key. It will occur if all the coins have been released to its blockchain, therefore, making the coin insufficient, which will result in increased demand, thus leading to an increase in value.
4. To avoid circulating the coins created through an error made on its issuance on the smart contract address
Several companies may decide not to use another smart contract address to build a token of the exact kind in order to conserve resources. For example, if a company mistakenly creates 110 million coins instead of 100 million coins, they may go on to create a new address whose private key is inaccessible and can then burn 10 million coins so they won’t be supplied to the economy before they are being distributed