Clear DefinitionsDeflation
1 min read
Pronunciation
[dih-fley-shuhn]
Analogy
Imagine a town where, instead of printing new money, the town periodically holds a public event where people voluntarily throw some of their money into a bonfire (token burning). This reduces the total amount of money in circulation. If this burning happens consistently or faster than any new money is introduced, each remaining dollar potentially becomes more valuable – that's deflation.
Definition
In the context of cryptocurrency, deflation refers to a persistent decrease in the total supply of coins or tokens over time. This can occur through mechanisms like token burning or if the rate at which tokens are destroyed exceeds the rate at which new tokens are created.
Key Points Intro
Cryptocurrency deflation describes a decrease in the total supply of tokens over time, potentially increasing scarcity.
Key Points
The rate at which the total token supply decreases.
Often achieved through deliberate 'token burn' mechanisms, where tokens are permanently removed from circulation.
Can increase the scarcity and potentially the value of remaining tokens.
Can occur if token burning (e.g., from transaction fees) outpaces new token issuance.
Some tokens are designed to be deflationary from the outset or become deflationary after an initial inflationary period.
Example
Some tokens implement a mechanism where a percentage of every transaction fee is burned. If this burn rate exceeds the rate of new token creation (e.g., from staking rewards), the token becomes deflationary. Ethereum's EIP-1559 introduced fee burning, making ETH potentially deflationary during periods of high network activity.
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