There are different types and use cases of cryptocurrencies. Over the years, there have been several innovations in the crypto ecosystem. Even now, there’s still room for new ideas as Blockchain technology is still emerging.
One of the best things to happen to crypto is deflanatory tokens and defamatory mechanisms.
What are deflationary tokens?
Deflationary tokens are tokens that reduce supply over time. Such tokens usually have a plan or method of reducing supply that is publicly known. Such a plan to reduce a token’s supply over time is called a deflationary mechanism.
How is a token’s supply reduced?
There are several ways to reduce a token’s supply. The most popular and permanent method is by burning the supply to be removed from circulation. Burning in cryptocurrency means sending an amount of crypto to a wallet that cannot be accessed forever thereby removing that amount from the circulating supply of such token.
The address that receives the tokens for burning is called a “burner” or “eater”. Once the tokens get to the address, burning is complete because the burner can only receive tokens, it cannot send them out.
Why is a token’s supply reduced?
The idea of deflationary tokens is based on the laws of supply and demand. Unlike Fiat currencies that are being minted regularly causing inflation, deflationary tokens are reducing their supply leading to increased value because there’s value in scarcity.
Benefits of token supply reduction
Increase in price: the scarcity of an item increases its value and demand drives prices upwards. When there’s an announcement or event of the burn of a particular token, the token usually appreciates in price because investors quickly fill up their bags with an expectation that the reduction in supply will result in an increase in price. The theory of reflexivity by George Soros comes to play here since it is really the perception of the event that brings about the result.
Makes a project look serious: Crypto projects with infinite supply or very large supply generally give a perception of it being a “shitcoin” or “memecoin”. Such coins are made just for the fun of it and they survive on trends. One of the characteristics of shitcoins is the token supply in billions. Burning of such tokens might mean the project is being taken seriously and they’re embracing scarcity.
Top 5 deflationary cryptocurrencies by market capitalization
- Binance Coin (BNB): BNB is currently the No. 5 cryptocurrency on CoinGecko’s ranking by market capitalization. It was launched in 2017 with a supply of 200million. This supply has been reduced by the quarterly buyback and burn deflationary mechanism to 161million at the time of this writing. This is a 20% decrease from the time of launch.
- Ripple (XRP): XRP is also another deflationary token that sits in the top ten cryptocurrency list by market capitalization. XRP has been able to move from its All-Time-Low (ATL) of $0.0026 in May 2014 up to an All-Time-High (ATH) of $3.40 in January 2018 which is over 1200x.
- Polygon (MATC): Polygon is a layer-2 scaling solution for the Ethereum Blockchain. It was founded in 2017 and currently sits at No. 12 cryptocurrency by market capitalization on CoinGecko. Polygon implemented the Ethereum EIP-1559 update which will make the MATIC token deflationary. This update is estimated to burn 0.27% of the supply annually.
- Tron (TRX): TRX is the native coin of the Tron network. The Tron network is particularly known for its low transaction fees and speed. TRX was made a deflationary token in October 2021 and has since then burnt over 11 billion TRX tokens.
- FTX Token (FTT): FTT is the native coin of the Futures Trading Exchange (FTX). Founded in 2019 by Sam Bankman-Fried, FTT adopted a weekly buyback and burn deflationary mechanism and has burnt a total of 20,869,359 FTT ($503,285,458) since its inception. This burn will continue until 50% of the initial 350million FTT tokens are burned.
