Deflationary Vs. Inflationary Tokenomics in Crypto

The tokenomics of a cryptocurrency project are a significant factor to consider when deciding whether it has future growth potential. As the number of coins and tokens available on the market continues growing, it is more important than ever for all digital asset investors to familiarize themselves with this term. Additionally, they should understand how tokenomics can be used to find the most profitable long-term passive income opportunities.

The beauty of analyzing the tokenomics of a project lies in the mechanism being used. We offer a detailed breakdown of the two models of tokenomics that are there.

Tokenomics

Tokenomics studies how tokens are used to incentivize desired behavior and drive the financial policy of a project. The tokenomics of a project can significantly influence its success and adoption, and there are two main approaches: inflationary and deflationary.

1. Deflationary Tokenomics

This is a tokenomics model where the supply of tokens decreases over time. This can be achieved through token burns or buybacks, where some tokens are permanently removed from circulation.

For instance, Binance Coin (BNB) is a deflationary cryptocurrency with a fixed maximum supply of 100 million tokens. The Binance cryptocurrency exchange reduces the supply of BNB by destroying a portion of the tokens each quarter.

There are two main ways to implement token burns in the deflationary model:

• Buyback and burn- the platform or the token creators purchase the tokens from the market and purposefully send them to the “burn” wallet, where they are unrecoverable.

• Burn on transaction- automatic mechanism defined in the token smart contract that burns a certain amount of token from each transaction.

Advantages of Deflationary Tokenomics

1. Increases token value: The decrease in the supply of tokens leads to an increase in the value of each token, making deflationary tokenomics a popular model for stablecoins and other types of cryptocurrencies.

2. Encourages saving and holding: Deflationary tokenomics incentivize users to hold onto their tokens, as the decrease in supply can lead to an increase in the value over time.

Disadvantages of Deflationary Tokenomics

1. Can decrease token velocity: The decrease in the supply of tokens can also lead to a decrease in the velocity of the token, as users are more likely to hold onto their tokens rather than spend them.

2. May not promote network growth: Deflationary tokenomics may not provide the same incentives for network growth and adoption as inflationary tokenomics, as the focus is on decreasing the supply rather than increasing it.

Inflationary Tokenomics

Inflationary tokenomics refers to the tokenomics model used in cryptocurrencies or tokens where the supply of tokens is designed to increase over time.

This is often achieved through methods such as minting new tokens or rewards for certain activities within the ecosystem.

E.g., Dogecoin has an unlimited supply after one of its creators, Jackson Palmer, abolished a hard cap of 100 billion DOGE in February 2014. That means increases in supply could outpace demand increases, potentially decreasing the value of each Dogecoin over time.

Advantages of Inflationary Tokenomics

1. Encourages early adoption: Inflationary tokenomics incentivizes early adopters by offering them a larger supply of tokens, which can appreciate over time as the network grows.

2. Promotes continued use: The issuance of new tokens can create a sense of urgency for users to participate and engage with the network, ensuring its continued growth and vitality.

Disadvantages of Inflationary Tokenomics

1. Decreases token value: The increase in the supply of tokens can lead to a decrease in the value of each token, as there is a more significant number of tokens available in the market.

2. Can create disincentives: The constant issuance of new tokens can also create disincentives for users to hold onto their tokens, as the value may continue to decrease over time.

Final Thoughts

Inflationary and deflationary tokenomics both have advantages and disadvantages, and the choice between the two will depend on the specific goals and needs of the project. In general, inflationary tokenomics may promote network growth and adoption, while deflationary tokenomics may be better for creating stability and incentivizing holding.

As such, the choice between inflationary and deflationary tokenomics will ultimately depend on the goals and needs of a project.