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Crypto: Inflationary vs Deflationary 🎲
What are the different types of crypto currencies and how do they stack up with inflationary and deflationary concepts.
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Cryptocurrencies come in different flavours; some are designed to be inflationary, some have a fixed supply of coins, and some are even deflationary.
Inflation & Crypto? Economics Lesson Time
When a currency is hit with inflation, its purchasing power drops like a rock. Suddenly, that crisp dollar bill in your pocket can't buy you as much as it used to - and that's a bummer. Sure, some inflation is good for the economy, but too much can leave you feeling broke and frustrated.
The bigwigs at the U.S. Federal Reserve try to keep inflation at a cosy 2% for a good reason. But there's no central bank calling the shots regarding cryptocurrencies. Instead, crypto developers and decentralised autonomous organisations (DAOs) vote on how things go down. It's like a digital democracy where token holders get a say, too!
What's really cool about some cryptocurrencies - like Bitcoin - is that a fixed number are out there. Once all 21 million bitcoins have been mined (which won't happen until the next century), nobody can make any more. Talk about exclusive!
Inflationary - to the moon(and not back, maybe?)
Inflationary cryptocurrencies have a predetermined growth rate, so you know exactly how many new coins will pop up. It's like a game of whack-a-mole but with tokens.
This means that their supply of coins grows over time but at a predictable rate. To control this growth, set rules exist, such as a fixed or variable maximum number of tokens that can be created. Once that limit is reached, no more tokens can be made.
Dogecoin, for instance, has an unlimited supply after one of its creators, Jackson Palmer, abolished a hard cap of 100 billion DOGE in February 2014. That means increases in supply could outpace demand increases, potentially decreasing the value of each dogecoin over time.
Deflationary - bought four apples, left with three (the vendor ate some)
Deflationary cryptocurrencies are like a black hole for money - they gobble it up and never let go. They do this by using tricks like transaction fees or "coin burning" to make coins disappear forever. It's like playing a game of Jenga, but the tower keeps getting smaller instead of removing blocks.
But just like in any game, some players can cheat. Miners and developers can change the rules and mess with the game. For example, miners might hold onto newly minted coins instead of selling them to make more money later. And some cryptocurrencies can even change the game's rules, like removing the cap on the total number of coins created.
Binance coin (BNB) is one example of a deflationary currency. The Binance cryptocurrency exchange burns – destroys – BNB each quarter to reduce its supply until the token’s supply hits 100 million BNB.
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Tug Of War, Anyone?
Think of them like a see-saw: one goes up, and the other goes down.
Deflationary cryptocurrencies have a fixed supply of coins, meaning their purchasing power increases over time. It's like a fine wine that gets better with age.
On the other hand, inflationary cryptocurrencies have a flexible supply, meaning their purchasing power may decrease over time. It's like that hot new trend everyone's talking about, but then it loses appeal.
The Good Things
Inflationary cryptocurrencies encourage spending and discourage hoarding, facilitating rapid adoption and increased liquidity. Plus, their inflation rate can be adjusted to fit the ecosystem's needs, like having a tailor-made suit for your financial system.
Conversely, deflationary cryptocurrencies incentivise holding and discourage spending, making them a great store of value that can hedge against inflation and economic uncertainty. They're like that vintage jacket that never goes out of style.
Bitcoin & Gold: A Friendship Made In Code Heaven?
Bitcoin and gold may seem like very different assets, but they share one crucial characteristic: scarcity. Like gold, Bitcoin's supply is limited and controlled, but in this case, by an algorithm hardcoded into the software. And just like with gold, the scarcity of Bitcoin makes it an attractive store of value for investors.
Bitcoin's inflation rate is designed to mimic gold's, with a stable rate that decreases over time. And with approximately 80% of the total Bitcoin supply already minted, the remaining coins become even scarcer as time passes.
It seems like Bitcoin has found a clever way to defy the traditional economic rule that as supply increases, inflation follows. With a fixed supply of 21 million BTCs and halving events that reduce mining rewards, Bitcoin's inflation rate continues to drop at an impressive 1.79% as of March 4. Meanwhile, the U.S. dollar's inflation rate is 6.4%, more than three times that of Bitcoin.
Bitcoin's got a trick up its sleeve to keep inflation low: deflationary models that make halving events more exciting than a clown car at the circus.
Meanwhile, the U.S. dollar's value is slipping faster than a greased-up pig at a county fair. Bitcoin's decentralised nature means it's less exposed to political and economic risks than traditional currencies. As Bitcoin's popularity grows, its scarcity factor could increase its value, making it hotter than a fresh batch of churros.
Ethereum, the second-largest cryptocurrency by market cap, started as an inflationary asset, but after transforming proof-of-work to proof-of-stake, it's now a non-inflationary asset.
Some experts even think it's more deflationary than Bitcoin, like saying a hot sauce is spicier than a jalapeño. Deflationary tokens are valuable because of their limited supply, like rare Pokemon cards, but what sets Ethereum apart is its killer app ecosystem.
As more Ether gets burned in the process, it becomes more deflationary, like a self-fulfilling prophecy of value. It's like a snowball effect, but instead of snow, it's Ether, and instead of rolling down a hill, it's gaining value.
It's like a game of tug-of-war between inflation and deflation, and we don't know who will win.
TTD Week That Was 📆
The week of crypto pullback and the crypto regulatory drama in the U.S.
Saturday: Chasing Kwon ⛓️👮
Friday: Fear the AI 🤺😱
Thursday: SEC's Howey WMD 🕸️ EU welcomes crypto 🟢
Wednesday: Cheese Grill Gary 👁️🗨️
Tuesday: The OG of Blockchain L1 👊💥
TTD Week In Funding 💰
Yoz Labs secures $5 million in funding for their smart contract auditing platform.
Flow secures $3 million in seed funding to build a rollup-centric NFT ecosystem.
Shield raises $21 million in pre-seed funding to enhance security in blockchain and DeFi.
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