A deflationary token is a type of cryptocurrency or digital token designed with an inherent mechanism that gradually reduces its supply. This reduction is typically achieved through diverse methods, but a common approach involves automatically burning a small fraction of the token transaction to effectively eliminate it from circulation. ^[1]

Overview

A cryptocurrency with a limited supply is inherently deflationary in nature. Through the deflationary token concept, the total supply of a token decreases, and the remaining tokens become more valuable due to increasing demand. One way in which tokens are eliminated from circulation is by burning. However, some deflationary mechanisms can cause the token's price to become highly volatile if the tokens are designed in such a way that too many of them are burned too quickly, making the remaining tokens too scarce, thereby skyrocketing the price. Nevertheless, the fundamental objective of this token model is to increase token demand by reducing its supply on the market. ^[1][2][3]

History

In 2019, the BOMB token became the first-ever deflationary cryptocurrency to implement token burns. Its deflationary mechanism was designed in such a way that every 1% of the BOMB token transferred would be burned. Since then, there has been a significant increase in the number and variety of deflationary currencies. Notably, many of these projects have essentially modified the open-source code of the BOMB project, making slight adjustments to variables such as the overall supply and burn rate. ^[12][13]

However, the BOMB token, which was launched in May 2019, has only 1 million BOMB tokens in circulation, and this number is rapidly decreasing. At this pace, it is projected that by 2034, there will be almost no BOMB tokens remaining. Judging by BOMB's price movement, the market doesn't appear to associate deflation with an automatic increase in price. Although there was a significant surge after the project's launch, the price declined in June 2019. ^[13]

According to BOMB creators, the token is primarily a social experiment rather than an attempt to create a conventional cryptocurrency. It serves as a reaction to the issue of many initial coin offerings (ICOs) losing value over time despite substantial investments. While BOMB doesn't entirely address these challenges, it has undoubtedly brought significant gains to early investors and has sparked numerous imitations in the cryptocurrency space. ^[13]

Deflationary currencies vary widely in their burn rates, ranging from as low as 0.1% to as high as 90%. Total supplies also differ significantly, with some currencies having as few as 1000 units and others as many as 200 million units. Aside from the original BOMB project, other notable deflationary currencies include Nuke (NUKE), ETHplode (ETHPLO), Mero Currency (MRO) - which is no longer active, Genesis Token (GEN), Void Token (VOID), M.O.A.B. (MOAB), Incinerate Token (INC8), Volcanoes (VOLC), etc. ^[12]

Deflationary Mechanisms in Crypto

Several diverse deflationary mechanisms apply to digital tokens. They include burning, buyback and burn, halving, token lockup, and staking rewards. ^[1]

Burning

This mechanism automatically eliminates a small percentage of each transaction, effectively decreasing the token's overall supply. Burning tokens adds value to holders because it steadily reduces the number of tokens in circulation, maintaining or even increasing demand in the process. ^[1][4]

Buyback and Burn

This method operates similarly to the burn mechanism but incorporates a buyback initiative, wherein the issuing organization or project repurchases tokens from the market and subsequently eliminates them. This approach diminishes the circulating supply by eliminating tokens, enhancing the asset's value due to sustained demand and reduced supply. ^[1][4]

Halving

This process aligns with the concept of Bitcoin's reward halving, where the rate of generating new tokens gradually diminishes over time, ultimately reducing the overall supply. Halving involves periodically reducing the block subsidy given to miners, guaranteeing a consistent issuance rate for a cryptocurrency until it reaches its maximum supply. ^[1][5]

Token Lockup

The token lockup mechanism, also known as the vesting period, is a timeframe during which cryptocurrencies cannot be sold or transferred. It prohibits individuals who have acquired such tokens through methods like airdrops, presales, or post-initial coin offerings (ICOs) from selling them on the public market. These lockup periods are implemented as a precautionary measure to prevent excessive token sales immediately after their introduction to the market. The main objective of introducing such a period is to protect the market from an oversupply of tokens, which, when sold excessively, can lead to a decrease in the token's value. ^[10][11]

Staking

A token with a staking mechanism rewards users who hold and lock up tokens in a designated wallet or contract. These rewards are distributed among the holders, potentially boosting the token's demand and reducing its overall supply in the market. ^[1]

Benefits

Deflationary tokens offer numerous advantages to both individuals and projects, due to their positive influence on the cryptocurrency market. The ways in which the development of deflationary tokens can assist projects are as follows: ^[6][7]

Enhancing the value of a coin

According to the basic principle of supply and demand, an increase in supply results in a decrease in demand. Deflationary cryptocurrencies aim to decrease their supply on the market, enhancing their scarcity and boosting demand. It's well known that scarce items are more appealing than readily available ones. In the context of deflationary tokens, individuals are more drawn to limited coins than those saturating the market. Ultimately, this leads to an increase in the coin's value over time. However, it’s essential to note that other market factors, like overall market sentiment, technological advancements, and regulatory changes, also play significant roles in determining a cryptocurrency's value. ^[6]

Increased profitability

The deflationary tokens gained prominence in the bull run due to their profit potential. It also helped to repurchase coins from holders as it led to coin burning, benefiting those who chose to sell their coins short. Ultimately, this process results in a value boost after the burning event. ^[6]

Eliminating excess token supply from the market

Excessive tokens circulating without buyers can jeopardize a cryptocurrency's prosperity. Deflationary mechanisms will, therefore, curb market saturation by eliminating surplus tokens. In addition, if tokens were mistakenly distributed, burning them becomes a viable solution to rectify the error. ^[2][7]

Examples

Nuke Token (NUKE)

NUKE is an Ethereum-based token with a unique strategy to rival BOMB. It boasts a limited supply of 1 million tokens and adopts a 2% burn rate. In contrast to BOMB, NUKE follows a different path—it plans to halt the token burn after a certain period, ensuring that the supply won't be completely exhausted within fifteen years. According to the project's projections, token burning will cease around 2036, setting it apart from its counterparts. ^[13]

NUKE believes in the practical utility of its token, branding itself as the "first deflationary currency with utility." The team behind NUKE aims to substantiate this claim by introducing a native decentralized exchange (DEX) and decentralized applications (dApps). Despite these ambitions, NUKE faces skepticism as it shares similarities with BOMB and numerous other Ethereum-based deflationary tokens like ETHplode and M.O.A.B, which often make minimal alterations to the original algorithm. ^[13]

ETHplode (ETHPLO)

ETHplode has gained significant recognition for its innovative approach to decentralized finance. Launched in 2019, one of its key characteristics is its deflationary nature, setting it apart from traditional currencies. ETHplode's limited supply creates scarcity and drives demand among users, aiming to secure a valuable asset with the potential for future appreciation. ^[14][15]

Operating on the Ethereum blockchain, ETHplode ensures secure and transparent transactions, benefiting from the established network's reliability. Additionally, ETHplode incorporates a burn mechanism, where a fixed percentage of every transaction involving the cryptocurrency is permanently removed from circulation. This deflationary strategy has the potential to enhance ETHplode's value over time by reducing its overall supply, especially if demand remains steady or increases. ^[14]

Moreover, ETHplode introduces an innovative staking mechanism, enabling users to earn rewards by holding their tokens in specific wallets. This incentive encourages active participation, bolstering the ETHplode network and enriching its overall value and ecosystem. ^[14]

M.O.A.B (MOAB) Token

The initial supply of M.O.A.B. was 20,000,000 tokens, featuring a 2% deflation rate for every transaction. In 2019, the team conducted a significant token burn, removing 15 million tokens from circulation. The M.O.A.B. token utilizes smart contracts for decentralized computation, enabling public verification of each transaction. This transparent approach allows users to easily confirm the network's current state, with the proof of deflation serving as its fundamental principle. ^[16]

Void Token (VOID)

VOID goes a step further with deflationary measures; it operates as a TRON-based token with a 3% burn rate on each transaction. Despite having a relatively high maximum supply of 10 million tokens, this quantity is not anticipated to impact its deflationary nature significantly. VOID is cautious about estimating how long it will take for the token supply to diminish, stating in its whitepaper, "Only time will tell." ^[13]

Similar to the NUKE token, VOID aims to create practical use cases. Additionally, it provides a staking mechanism that distributes rewards without causing inflation, as these staking rewards are derived from the token's original supply. ^[13]