How do deflationary tokens work?

Asked 2 years ago

I have a very limited understanding of deflationary tokens. How do they work?

Milo Barron

Friday, July 29, 2022

Unlike inflationary assets (like the US Dollar, for example) deflationary assets have a limited (finite) supply that cannot be surpassed under any circumstance. Let's compare the US Dollar with Bitcoin as an example. In 2020 and 2021 the Treasury Department printed around 40% of all US Dollars to ever exist since the inception of the dollar as a currency (over 200 years ago). And, normally, with each new dollar printed, the value of all other dollars slightly reduced, leading to an inflationary environment, where as time passes, the asset loses value.

On the other hand, when Bitcoin was created in 2009, the team behind it set the cap of all Bitcoins to ever be created at 21,000,000. This means that as time passes, creating (mining) a new Bitcoin becomes slightly harder, while the opposite is true for the US Dollar. Just like there is a finite amount of gold and no one can create gold from nothing (which isn't the case for the US Dollar), Bitcoin is also deflationary. The only way to generate a new Bitcoin is through "mining" & getting a part of the finite supply of coins that can ever be created - making it deflationary.

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