“Inflation is one of the reasons that the fiat currency is frowned upon by people and experts all around the world. As there is no limit on the total supply of the fiat currencies, they become inflationary. The crypto space has come up with the idea of token burn that makes a crypto currency deflationary in nature.”
The Issue of Inflation
Everyone around the world is aware of the money printing power of the Governments and the banks around the world as they can print unlimited amounts of fiat currency. This unlimited amount of printing generates inflation that we are facing right now post the pandemic. As more and more fiat currency is printed and circulated in the market, the purchasing power of people increases and the demand for the products and services increases. This creates a supply shock and results in increasing the prices of the products and services or in other words reducing the purchasing power of the fiat currency.
The Token Burn
Every cryptocurrency token has a Total supply. Bitcoin has a total supply of 21 Million BTC; Cardano has a total supply of 45 Billion ADA. The supply of a token defines its demand and also its value. The higher supply of a coin will result in lower demand and vice versa. There are certain cryptocurrencies such as Ethereum that have an unlimited supply and other cryptocurrencies that have a very high token supply which creates an environment for inflation. Thus such cryptocurrencies have introduced a mechanism of token burn to reduce the supply of tokens.
The token burn is the term given to removing the cryptocurrency tokens from the circulation by sending them to a specially designed wallet without a private key. Once the tokens are transferred to these wallets they are irrecoverable and thus are permanently removed from the circulation. There are different means of performing a token burn adopted by various cryptocurrencies. Some cryptocurrencies use a part of their profit to buy back and burn the tokens whereas cryptocurrencies like ethereum burn the tokens with the gas fees generated during the transaction.
The Token Burn Mechanism: A Deflationary Approach
The token burning mechanism makes a currency deflationary by removing the amount of tokens burned out of the circulation. This can lead to decreased supply of the currency overtime. The token burning mechanism makes the currency deflationary and hence results in increasing the demand of the cryptocurrency. Over time as more tokens are burned, less supply will be remaining for all the users that demand the cryptocurrency.
Bitcoin for instance has a total supply of 21 Million BTC for already a population of 7 Billion people in the world. The reason for the demand is clearly evident. Though Bitcoin does not require a token burn mechanism, the cryptocurrencies with trillions of tokens in the supply require the mechanism to create a more sustainable environment for the cryptocurrency.
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
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