Last week we defined “inflationary”, this week we’re going to describe what is meant when a currency is said to be “deflationary”. The term “deflationary” is used to describe cryptocurrencies where the supply of coins in circulation decreases over time. This occurs as this type of cryptocurrency has a fixed maximum number of coins, causing the demand to go up. As a result, the intrinsic value and scarcity of deflationary cryptocurrencies will eventually increase, encouraging holders to keep these assets as a good store of value while spending less.
Deflationary cryptocurrencies are a great way to preserve value during inflation and hyperinflation. To create deflationary cryptocurrencies, there are two common methods to reduce token supply: fixing the supply and coin burning.
Limiting the number of tokens created suppresses having an endless supply, which would instead make the asset inflationary. Many protocols will take one step further to secure deflation by destroying tokens in circulation through coin burning. This can be achieved in many ways: manually removing coins from circulation, sending tokens to inactive wallet addresses, implementing mechanisms that automatically burn tokens using transaction fees, and more.