Understanding Cryptocurrency Models: Inflationary, Deflationary, and Non-Inflationary

Discover how cryptocurrency models impact value and scarcity and learn why $CACAO's stable, non-inflationary approach stands out.

    Key Takeaways

    • The model of a cryptocurrency is not defined solely by its supply mechanism; it also includes factors like issuance rates and burning mechanisms.
    • Different models impact the value of a cryptocurrency, with deflationary models potentially increasing value through scarcity.
    • $CACAO falls within the non-inflationary spectrum, maintaining a stable supply and value.

    One of the key lessons we've learned from crypto is the remarkable diversity in systems for distributing, issuing, and circulating tokens. In theory, it seems straightforward: if the number of coins in circulation increases over time, it’s inflationary; if the number of coins in circulation decreases over time, it’s deflationary. But is it? The reality is much more complex. If we only considered these factors, we might mistakenly conclude that Bitcoin is deflationary because it has a cap, and Ethereum is inflationary because it doesn’t have a limit. However, this is where mechanisms like issuance rates, circulating supply, and burning mechanisms come into play.

    Bitcoin: While Bitcoin has a fixed maximum supply of 21 million coins, it is currently inflationary because new coins are still being mined and added to the circulating supply, plus halved every 4 years. This will continue until all 21 million coins are mined, which is expected around the year 2140. 

    Ethereum: Ethereum does not have a capped supply, which traditionally would suggest it is inflationary. However, with the introduction of EIP-1559, Ethereum burns a portion of the transaction fees, which can result in periods where more ETH is burned than issued, making it deflationary during those times.

    Understanding these dynamics requires looking beyond the simple increase or decrease in supply and considering the specific mechanisms that control how new tokens are introduced and how existing tokens are removed from circulation.

    What Determines the Model of a Cryptocurrency?

    A cryptocurrency's model is primarily determined by its supply mechanisms and how it handles new coin issuance and removal from circulation. These mechanisms are coded into the cryptocurrency’s protocol and define its economic behavior.

    Key Factors:

    1. Issuance of New Coins: How and when new coins are created.
    2. Burning of Coins: Whether and how coins are permanently removed from circulation.
    3. Total Supply: The maximum number of coins that can ever exist (if capped).

    Circulating Supply and Supply Mechanisms

    Circulating supply refers to the number of coins that are currently available in the market and can be traded. Supply mechanisms include mining, staking, and token burns, which influence whether a cryptocurrency is inflationary, deflationary, or non-inflationary.

    Requirements for Each Model

    1. Inflationary: New coins are continuously generated (with or without a fixed supply), and any burning mechanisms do not offset the issuance.
    2. Deflationary: Coins are burned at a rate higher than the rate of issuance, and the issuance of new coins is optional.
    3. Non-Inflationary: The circulating supply remains constant and may have a fixed supply, but the key is that the circulating supply does not change.

    Impact on Value

    1. Inflationary Models:
      • Potential value dilution: As more coins enter the market, the value per coin may decrease unless demand keeps pace.
      • Incentivizes Participation: Rewards mechanisms can encourage mining and staking.
    2. Deflationary Models:
      • Potential value appreciation: Reducing the supply can increase the value of each coin if demand remains constant or increases.
      • Scarcity effect: Creates a perception of scarcity, which can boost demand.
    3. Non-Inflationary Models:
      • Stable Value: With a constant supply, the value depends more on demand dynamics.
      • Predictability: Easier to predict long-term value trends without the variables of issuance and burning.

    Identifying Inflationary vs. Deflationary Cryptos

    To determine whether a cryptocurrency is inflationary or deflationary, examine:

    • Whitepapers and Protocols: These documents outline the supply mechanisms and economic models.
    • Blockchain Explorers: Tools that track issuance and burning rates.
    • Economic Metrics: Assess the coin’s supply changes over time.

    Can a Cryptocurrency Adopt Both Models?

    Yes, a cryptocurrency can adopt elements of both models through dynamic mechanisms:

    Where Does $CACAO Stand?

    $CACAO is considered non-inflationary due to the following reasons:

    Total Supply of 100 Million: $CACAO has a fixed total supply of 100 million tokens, all of which were minted once and distributed during the Liquidity Auction. There will be no mechanism for creating additional $CACAO tokens beyond the initial Fair Launch. This ensures that the circulating supply remains constant over time.

    Liquidity and Security Functions: $CACAO is integral to the Maya Protocol ecosystem, used for securing the network through the Proof of Bond consensus mechanism and providing liquidity in various pools. This consistent utility helps maintain the value and demand for $CACAO within the ecosystem without altering the supply.

    Deterministic Value: The deterministic price of $CACAO is directly linked to the Total Value Locked (TVL) in the ecosystem. This linkage ensures that the market cap of $CACAO reflects the value of the assets in the liquidity pools, providing a stable economic foundation.