Why do more people prefer deflationary cryptocurrencies?

Source: Medium

Translation: First Class (First.VIP)

Bitcoin believers often reject inflation. Inflation usually represents a decline in value. Therefore, many people will prefer deflationary tokens.

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In the blockchain, the continuously decreasing supply of cryptocurrencies is collectively referred to as deflationary cryptocurrencies. Deflation can be achieved by burning a certain percentage of tokens, buying back and burning, or buying back and holding. As we all know, cryptocurrencies with a fixed supply such as Bitcoin are deflationary by default. Bitcoin has some unique explanations of the dynamic relationship between inflation and deflation. In recent history, government-issued inflation currencies have dominated the entire financial system. The United States has repeatedly created artificial depressions caused by the central bank's artificially low interest rates and a huge wave of foreign bonds. This intervention led to an unsustainable credit crisis and ultimately to the Great Depression.

In this article, we will discuss deflationary cryptocurrencies. We will learn what deflationary cryptocurrencies are and the benefits of using them.

The disadvantages of inflationary currencies

The operating model of the US capital market is the inflation model. In this model, the currency is printed into the market every year according to the decision of the central bank, and the central bank has the right to devalue the currency or increase the money supply. The central bank prints money out of thin air, changes the reserve requirement ratio and raises and lowers interest rates to manipulate currency, a series of artificial market signals and manipulate credit prices. Inflationary money supply can lead to excessive leverage and poorly managed investments.

The principle of this model is that when your money depreciates, you may spend it faster than saving it. This is the case for an economy with free-flowing cash (expenditure economy), because it realizes cash outlays.

How does deflationary cryptocurrency work?

In the case of deflationary cryptocurrencies, you have complete control over your funds, as the money printed is a fixed supply.

Taking Bitcoin as an example, the flexible mining difficulty and halving of mining rewards ensure the deflationary nature of its network, which can curb inflation, and that by design, the value of Bitcoin continues to grow. For example, if you buy an item today at the "X" price of BTC, in the future, due to the working principle of the deflation model, you will buy the same item for an amount lower than X.

Satoshi Nakamoto noticed that the government-backed currency had inflationary issues, so he worked to develop an alternative storage method similar to precious metals but with a new digital format. Bitcoin is deflationary, not only because it has a fixed supply, but about every four years, mining rewards (issues) are reduced by half, which is a reduction of 210,000 blocks.

Bitcoin and other deflationary cryptocurrencies not only represent innovative technologies in the blockchain architecture and consensus mechanism, but also a way to transfer deflationary long-term value storage to the digital world rather than the physical world (precious metals and precious stones) More extensive trials.

Advantages of deflationary cryptocurrencies

Deflationary cryptocurrencies bring many benefits to users and crypto companies, including:

1. Can prevent unsold tokens from circulating to the market:

Deflationary cryptocurrencies are not affected by market fluctuations, so they will not depreciate, and investors participating in ICOs will not be affected.

Maximized profit

In the case of using a specific cryptocurrency to share the profit of a company / project, if the company / project holds a small percentage of tokens and receives less revenue, the company / project may start buying its tokens on various exchanges To increase the final dividend of the project party.

3. Increase the value of the token

If a company wants to attract more investors to invest in its tokens, they may agree to repurchase tokens with a certain percentage of the profits and burn them to addresses that are not accessible to their private keys. If all tokens are released on the blockchain, this will also lead to increased demand and increased value.

4. Avoid circulation of tokens generated by the wrong issuance of smart contract addresses

To save resources, some companies may decide not to use another smart contract address to build a precise type of token. For example, if a company mistakenly created 110 million tokens instead of 100 million tokens, then they may continue to create a new address, the private key of that address is not accessible, and burn 10 million tokens, so Until the release, tokens will not be provided to the market.

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