Many of us struggle to understand the difference between inflation, deflation and the impact these terms have on our daily budgets. In fact, right now we read, hear and see about inflation happening in the world economy due to world events. But what happens when we talk about inflationary vs. deflationary tokens?
To best understand the difference between how the inflationary vs. deflationary crypto models work in tokenomics, we should first review the economics of inflation and deflation.
Inflation and Deflation: The Economics
Inflation occurs when things become more expensive because prices increase, and the fiat money supply increases. The concept of deflation describes an increase in the value of fiat money due to lower prices and a low fiat money supply – this is often associated with higher unemployment and lower wages usually because businesses aren’t charging as much and thereby aren’t profiting as much.
What is Inflation?
The definition of inflation in economics is a persistent, substantial rise in prices associated with an increase in fiat money, which results in the devaluation of fiat currency. In simple terms, inflation is the result of your fiat money no longer buying as much because everything is becoming more expensive.
What is Deflation?
Deflation, in the world of economics, is defined as the fall of prices or the contraction of credit and fiat money. In simpler words, deflation means that prices are low, and fiat money has a high value. Deflation is sometimes referred to as the opposite of inflation. It can be caused by decreased demand or increased supply (and competition) for products and services.
Fiat currencies are inflationary in nature as the supply can be increased at will, which reduces the value of the single currency unit as the cumulative economic activity remains constant.
On the other hand, deflation is a standard economic term that signifies reduced demand and increased supply. While deflation, in a standard scenario, can lead to recession and a decline in the availability of goods, it in a way increases the currency’s or asset’s purchasing capability.
Inflationary and Deflationary Crypto Assets Explained
Unlike fiat currencies and their economic implications, leading to inflation and deflation, crypto assets have a more defined take towards these concepts. An inflationary crypto project has a system where the coins keep increasing over time. Similarly, a deflationary cryptocurrency is a project where the coins reduce over time, either with minting rewards lowering in time or the tokens burning out in a controlled and purposeful plan.
Factors that Determine the Economics
Now that you are aware that the inflationary and deflationary nature of crypto assets is directly related to the coin supply, it is important to take note of a few important elements before proceeding any further.
Certain crypto players have a set number of coins that can ever be circulated within the given blockchain. Well, if you follow Bitcoin closely, you know that there can only be 21 million bitcoins.
The number of cryptos synonymous with a particular Blockchain, currently moving around on-chain, is termed as the circulating supply. The term refers to the number of cryptocurrency coins or tokens that are publicly available and circulating in the market.
Total Supply is the total amount of coins in existence right now (minus any coins that have been verifiably burned).
Crypto Tokenomics: The Best Way to Understand Crypto Inflation and Deflation
In the end, it all comes down to the demand and supply of the concerned crypto asset and what matters is the quality of the coin, overall production, and even the distribution of that coin. These terms are collectively known as Tokenomics.
Crypto tokenomics is a term that is often released with the blockchain’s whitepaper, revealing whether the native coin has an unlimited, ever-increasing supply or a fixed and even reducing supply.
Inflationary vs. Deflationary Crypto Assets
Contrary to popular belief, inflationary crypto assets, i.e., the ones with an unlimited supply like Dogecoin and Ethereum aren’t all that bad. While they might still experience higher supply and lower demand, it is important to note crypto-ecosystems aren’t as prone to economic downturns as the standard fiat systems.
Therefore, even if the coin supply is unlimited, it doesn’t affect the bigger picture, i.e., the long-term supply and demand. Confused?
Imagine Ethereum, which has ETH as the native, unlimited currency. Despite having no hard capping, the Ethereum blockchain is programmed in such a way that only a fixed amount of ETH can be mined each year. Therefore, if the supply of ETH until now is valued at a market cap of 100 million, only 18 Million ETH can be mined every year, making the inflation percentage stand at 18%.
But then, as the market cap of ETH increases over time, i.e., say 200 million, the fixed 18 Million mined ETH translates into an inflation rate of 9%, which works in favor of the Ethereum ecosystem. Therefore, when the crypto ecosystem is concerned, an inflationary profile isn’t all that bad.
Crypto projects with a fixed coin supply, such as the Binance Coin, Bitcoin, Cardano, and even Ripple, are expected to show reduced supply and higher demand in the future, making them prone to achieving a higher valuation over time.
Inflationary, Deflationary, and Disinflationary: The Third Cog in the Crypto Wheel
Apart from inflationary and deflationary crypto assets, the existing market also brings a new project into the mix. That is the ‘Disinflationary’ cryptocurrency. Unlike deflationary coins like XRP, Bitcoin Cash, and Binance Coin that even burn coins to boost prices further, disinflationary crypto assets do add new coins to the chain, but with an eye on gradually decreasing inflation rate.
This makes the relevant crypto assets stay ahead of the inflation parameter, and without having to limit the token supply.
Fact Check: Did you know that Bitcoin is disinflationary in nature as even though new coins are added with each mining effort, the rewards are halved after every four years, making the standard inflation rate less than 2%.
How do Crypto Inflation, Disinflation, and Deflation fit into the existing Market?
The existing demand and supply of a particular crypto asset influences its token price, both in the long and short term. However, regardless of what transpires within the Blockchain ecosystem, it eventually comes down to user preferences, use cases, token distribution, and overall mining structure or, rather, the consensus mechanism.
And unlike traditional economic systems where a higher inflation rate can lower the value of the concerned currency, the crypto space is a continually evolving one where the market cap keeps increasing to account for the unlimited coin supply, making it somewhat disinflationary in nature.
Q1. What are the top crypto assets with unlimited coin supply?
A1. Ethereum (ETH) and Dogecoin (DOGE) are some of the more popular crypto assets with unlimited coin supplies. However, if you look at crypto tokenomics carefully, this inflationary nature works in favor of these crypto players.
Q2. Which coins have a limited supply?
A2. Top crypto players like Bitcoin, Cardano, XRP, Avalanche, and Litecoin have limited supplies. However, among these, Bitcoin is disinflationary, whereas XRP is deflationary, as XRP coins are burned to boost prices.
Q3. When is Bitcoin expected to hit the max supply limit?
A3. Based on the current Bitcoin halving rates, the 21 million coin limit is expected to max out by 2140.