An increase in the cost of goods and services is called inflation. When there is an excess of currency in circulation, the value of money depreciates. Conversely, deflation is the term that describes a rise in a currency’s value and a corresponding decrease in the cost of products and services. A decrease in the currency’s supply is typically the cause of deflation.

It is beneficial for the economy to have some inflation since it encourages consumers to spend more money. But it gets troublesome when prices increase more quickly than people’s salaries. There are various reasons that have led individuals to invest in cryptos, which are marketed as a hedge against inflation. The value of many of these cryptos has increased dramatically in the past few years. Good returns allow you to effectively offset inflation-driven price increases by increasing the value of your investment over time.

Even cryptos, nevertheless, have the potential to cause both deflation and inflation. Some are inflationary because they have an infinite supply of tokens, and others are deflationary because they have a set quantity of tokens in circulation. Let’s have a look at the inflationary and deflationary cryptos that exist in the crypto space.

What Are Inflationary Cryptos?

Inflationary cryptos represent a unique subset within the broader realm of digital assets, characterized by a deliberately designed mechanism to increase the token supply over time. Unlike traditional inflation associated with fiat currencies, where central banks print more money, inflationary cryptos employ programmed algorithms or smart contracts to circulate new tokens. These additional tokens are often distributed as rewards to network participants, such as miners or stakers, and aim to incentivize their continued engagement with the blockchain.

Inflationary cryptos seek to strike a balance by maintaining a controlled and predictable rate of token issuance, fostering ongoing network activity while mitigating the risk of hyperinflation.

Several examples of inflationary cryptos exist, each with its unique tokenomics and governance model. These tokens, including popular ones like Dogecoin and Ripple’s XRP, have garnered attention for their distinct approach to managing the coin supply.

Examples of Inflationary Cryptos

#1 Dogecoin (DOGE)

Originally created as a meme coin in 2013 by software engineers Billy Markus and Jackson Palmer, Dogecoin was intended to be a playful homage to Bitcoin without any practical purpose. Its name is derived from an internet meme featuring a Shiba Inu dog with comedic spelling, hence the term “doge” instead of “dog.”

According to its creators, Dogecoin has been utilized for online purchases, charitable causes, and fundraising initiatives such as supporting the 2014 Jamaican Olympic bobsled team and providing clean water to various regions worldwide. As crypto, DOGE is a digital token that can be acquired in exchange for traditional currency and securely exchanged between parties via the Internet.

#2 Ripple (XRP)

Created and developed by US-based tech company Ripple Labs, XRP is a real-time gross settlement system, currency exchange, and remittance network. Ripple and XRP are frequently used interchangeably, whereas, in reality, Ripple is the company’s name and network underlying the XRP. In contrast, XRP is the native crypto token for Ripple Labs’ products.

Ripple advertises itself as a global payments network with major banks and financial institutions as customers. Rather than using blockchain mining to authenticate transactions, the Ripple network employs a unique distributed consensus method in which participating nodes conduct a poll to verify the transaction’s validity. And this is what enables Ripple to execute near-instant confirmations without the need for a central authority.

Consequently, XRP stays decentralized and outperforms many of its competitors in terms of speed and reliability. Powered by a decentralized network of more than 150 validators worldwide, XRP is also highly scalable and can handle 1,500 transactions per second, 24 hours a day, seven days a week, meeting the same throughput as the Visa payments network.

What Are Deflationary Cryptos?

Deflationary cryptos constitute a distinctive category within the crypto ecosystem, characterized by a deliberate and programmed reduction in the total token supply over time; unlike traditional inflationary models, where central authorities can print more currency, deflationary cryptos, such as Bitcoin, employ mechanisms like fixed issuance schedules or token burning to create scarcity.

The concept is rooted in economic principles of supply and demand, aiming to mimic the scarcity and value preservation qualities often associated with precious metals like gold. By limiting the maximum supply of tokens, deflationary cryptos strive to create a scenario where the demand for the digital asset exceeds its available quantity, potentially leading to an increase in value as a response to increased scarcity.

One of the prime examples of deflationary cryptos refers to the crypto exchange Polygon, which burns its native MATIC tokens to reduce the supply of the token.

Examples of Deflationary Cryptos

#1 Polygon (MATIC)

Polygon is a crypto with a MATIC symbol and a technology platform that connects as well as scales blockchain networks. Polygon—dubbed “Ethereum’s Internet of Blockchains “—debuted in 2017 as Matic Network.

The Polygon platform connects Ethereum-based projects by utilizing the Ethereum blockchain. Using the Polygon platform can boost a blockchain project’s flexibility, scalability, and governance while still providing the security, interoperability, and structural benefits of the Ethereum blockchain.

MATIC is an ERC-20 token, which is interchangeable with other Ethereum-based digital currencies. MATIC manages and secures the Polygon network and collects network transaction fees.

Polygon adopts a Proof-of-Stake (PoS) consensus mechanism for security and network maintenance, allowing users to earn rewards by staking MATIC tokens.

After knowing about inflationary and deflationary cryptos, let’s look at the key factors responsible for their economics.

3 Key Factors Impacting the Economics of Inflationary and Deflationary Cryptos

• Maximum Supply: Firstly, the maximum supply establishes an upper limit on the number of tokens a crypto can introduce into circulation. A prime illustration of this concept is Bitcoin, characterized by its definitive 21 million BTC cap.
• Circulating Supply: Secondly, the circulating supply, a crucial point of differentiation between inflationary and deflationary cryptos, represents the total number of tokens associated with a specific blockchain actively moving within the chain.
• Total Supply: Lastly, the total supply encompasses the overall quantity of tokens designated for a particular crypto. This metric may also denote the cumulative number of tokens mined on the blockchain network, drawing parallels with the description of circulating supply.

Bottomline Thoughts

The crypto space presents a dynamic landscape shaped by diverse economic models, with inflationary and deflationary cryptos as distinct paradigms. Inflationary cryptos, exemplified by tokens like Dogecoin and Ripple’s XRP, embrace a controlled increase in token supply, fostering ongoing network activity. On the other hand, cryptos like MATIC follow deflationary principles, emphasizing scarcity through capped supplies and strategic token burning. As investors and traders navigate this ever-evolving space, understanding the nuances of inflationary and deflationary dynamics becomes imperative for informed decision-making in the crypto realm.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.