Deflationary currencies are a relatively new class of projects in the cryptocurrency/blockchain arena. The principal is simple. After each transaction, certain percentage of the tokens are burned, depending on the transacted amount, which results in constant reduction in overall supply.
The first ever deflationary currency was BOMB (ticker code: BOMB) which has a burn rate of 1%. Since then, deflationary currencies have exploded in number and types. Unsurprisingly, most of them have just modified the open source code of the BOMB project, changing variables such as the overall supply and burn rate slightly. Deflationary currencies have burn rates ranging from as low as 0.1% to as high as 90%. The total supply ranging from as low as only 1000 units to as high as 200 million units. Apart from the original BOMB project, other well-known deflationary currencies are ETHplode (ETHPLO), Mero Currency (MRO) – now defunct, Genesis Token (GEN), Void Token (VOID), M.O.A.B (MOAB), Incinerate Token (INC8) and Volcanoes (VOLC).
Defined Purpose and Inflation Problem.
The defined purposes of the deflationary currencies are multifaceted and highly ambitious. They range from a combination of being a currency for day to day use, a store of value, an investment vehicle and hedging instrument. However, deflationary currencies are yet to take off and achieve any of those purposes.
Inflation is defined as “the reduction in the purchasing power of a currency over time”. Most other cryptocurrencies and tokens are either inflation neutral (meaning overall supply doesn’t increase or decrease over time) or inflating (meaning new units are added to the overall supply over time). On the contrary, deflationary currencies actually reduce or burn supply over time, the rationale being that since supply is decreasing constantly, the scarcity should rise thus increasing the value of the remaining tokens – resulting from financial concepts of demand and supply. Add to that, the relatively low overall supply of most deflationary tokens, the value should theoretically in presence of sufficient demand, skyrocket.
Present State of Deflationary Currencies.
However, deflationary currencies are yet to prove their worth. In the current bearish atmosphere of crypto markets, which seem to be in purge mode, most crypto projects with no actual use cases have rapidly declined in value. A lot of them are effectively “out of service” with negligible daily trading volume and low prices.
Deflationary currencies also suffer from similar problems that plague many other cryptocurrency projects. The lack of proper use cases and adoption, illiquidity, not being listed on well-known trusted exchanges and lack of tokens burning on centralized exchanges (since they run a snapshot of the blockchain, rather than executing transactions on actual blockchain, resulting in no burning as long as the currency or token is on the exchange), majority of supply being held by teams and improper management of the projects. So while the actual idea and principle of deflationary currencies is sound, the current execution and state isn’t.