Blockchain

What are Deflationary Crypto Assets?

deflationary crypto

Source: Medium

Crypto assets are an emerging class of assets with a lot of significant potential for wealth generation and preservation.

 

Deflationary crypto assets are cryptocurrencies, coins, and tokens that decrease in total supply each time a token transfer happens. A certain proportion of the transferred amount will be burned with every transfer.

 

This article will explain deflationary crypto assets, some examples, the benefits of deflationary assets, and the legal hurdles that deflationary crypto assets face.

Deflationary Crypto Assets

A deflationary cryptocurrency is one with a depreciating supply of coins. In other words, the number of coins in circulation decreases, making an individual coin more valuable.

 

Deflationary cryptocurrencies often have a fixed, maximum supply cap.

 

Bitcoin, for instance, is an inflationary cryptocurrency. It also has a fixed asset supply of 21 million coins, which is a deflationary aspect. Ethereum, on the other hand, recently moved to limit its own supply following a major programming update dubbed; London Hard Fork that occurred earlier this summer. Bitcoin’s fixed asset supply and Ethereum’s London Hard Fork make them deflationary in nature.

 

  

How do deflationary crypto assets work?

Deflation in cryptocurrencies majorly involves burning tokens from circulation. Platforms employ two types of burning mechanisms;

  • buyback and burn
  • transaction burning

 

Buyback is a mechanism that involves a platform buying back tokens from holders and locking them in an eater address; a platform may use part of its profits to execute a buyback.

 

As for the burning of transactions, a platform employs a smart contract that will automatically burn part of the transaction fees. This depends on the number of transactions on a platform; the more the transactions, the more tokens the platform burns and vice versa.



Advantages of deflationary crypto assets

Deflationary crypto assets present numerous benefits to users and crypto platforms, including;

 

Enables companies to avoid circulating unsold coins to the market

Deflationary crypto assets are not affected by market volatility; therefore, they don’t devalue in price, and investors who took part in their ICO’s are not affected.

 

Increase the valuation of the coin

A platform is looking to entice more investors to invest in their coin, they may agree to buy back the coin and burn it to a burn address – an address with an inaccessible private key. This makes the coin insufficient, resulting in increased demand, thus leading to an increase in value.

 

Increasing returns

During the recent bull run, deflationary crypto assets have taken the spotlight. This element directly contributes to investor interests as they amass more profits.

 

Legal hurdles facing deflationary crypto assets

Deflationary cryptocurrencies are high-risk speculative vehicles. They have a hard cap that leads to volatility and even higher rates of deflation. This is problematic if the desired goal is widespread adoption of the asset as a currency.

 

The high speculation could lead to more hoarding of the crypto assets eventually making them a poor currency.

 

Miners are needed to maintain the security and stability of the underlying blockchain. Right now, miners make their money through payments for generating new coins, but once the hard cap is reached, the only source of revenue will be transaction fees.



Final thoughts

Cryptocurrencies with a defined supply are deflationary by nature. They achieve this status because as long as investors buy and hold the coin, its supply reduces. This implies that users or the blockchain team will participate in activities that will reduce the coin’s supply on the blockchain. One of the common ways to achieve this end is burning tokens. As a result, there is an increased number of deflationary crypto assets entering the market today. SafeMoon, Core, Burny, and Boom tokens are some of the popular deflationary tokens.

 

About author

Education Ecosystem is a decentralized learning ecosystem that teaches professionals and college students how to build real products. We are building the world's biggest learning ecosystem for future technology topics such as artificial intelligence, cybersecurity, game development, data science, cryptocurrencies, and programming.