Introduction
How well do you understand the tokenomics behind your favorite crypto projects? In a nutshell, tokenomics is a term that stands for the economic logic of a token. It defines the utility, functionality, and how the token derives value. One should consider various aspects of a project’s tokenomics, such as the mechanisms it uses, how it is distributed, or its supply and demand.
In this article, we will consider the lifecycle of a token and whether it falls within the category of it being inflationary or deflationary, and why is this useful knowledge in your journey in the DeFi space to determine the future potential growth of a particular crypto project.
What are Inflationary Tokens?
As its name suggests, inflationary tokens would potentially increase their circulating supply over time as there is no limit to how many tokens can be minted. Based on basic economic logic, an increase in supply would only mean that the value of the token will decrease in tandem.
This would highlight the importance for projects to be mindful of how their economic model issues new tokens, as no investor would be interested in believing in a token with project owners that can mint an unlimited supply of tokens indefinitely, as and when they desire. It simply does not sound like a worthwhile investment.
Therefore, tokens are generally minted through processes such as staking or mining, where validators or miners would earn rewards for supporting the network. Huge tokens such as BTC follow this model, as, their supply increases over time, with new tokens being minted through the mining process. In many cases, crypto projects start off by following an inflationary token model, where they will aim to transition to a deflationary model to create a sustainable token economy.
What are dDeflationary Tokens?
On the other hand, deflationary tokens would simply mean the opposite, where the supply of tokens will decrease over time making them increasingly scarce and elevating the price of the token. A project would typically identify a cap for the total amount of tokens that can be minted, which allows the project to maintain the value of the token, increasing opportunities from investors or funding.
The idea of deflationary tokens is still generally new, and it is made possible through the burning of tokens. There are two main ways tokens are removed from the circulating supply: ‘ Buy back and burn’ or ‘Burn on Transaction’. Such processes would transfer these tokens into a black hole, making them indefinitely unusable.
Conclusion
With a plethora of cryptocurrencies in the space, evaluations on the potential growth of a project should not be limited to just the token classification of whether it is inflationary or deflationary, but rather, various other factors that could determine a project’s success.
While you may immediately conclude that deflationary tokens make more sense, it would be wise for you to make deductions objectively, where both types of cryptos have their pros and cons.
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