Cryptocurrency has managed to disrupt several conventional financial systems through its path-breaking technology. In quite a short time, cryptocurrency has assumed the role of a global phenomenon.
Besides the well-known qualities of decentralization, transparency, and security that crypto brings to the table, a few cryptocurrencies are also offering positive performance even during global deflation.
Understanding Money Supply in the Context of Fiat Currency
The money supply is different for fiat currencies and their crypto counterparts. For fiat, such as dollars or euros, money supply depends on the monetary policies set by a central bank or government which dictates the amount of money to be printed and circulated in the economy.
Central banks can also take money out of circulation either to repeal old or defaced notes or to decrease the total supply of currency as and when needed.
Changing money supply in the economy thus gives central banks the leverage of handling monetary crises by allowing more free flow of currency, controlling lending interest rates, and influencing purchasing power.
This also gives central banks immense power and control over various aspects of the market, frequently benefitting corporate interests more than the welfare of the common man. It is the money supply that leads to either inflation, disinflation, or deflation in the economy, affecting price levels and other economic prospects.
What is Deflation?
Talking in macroeconomic terms, deflation is a decline in the general price level. It is the opposite of inflation; put simply, it enables people to buy more with the same banknote.
It is important to understand here that prices can decline for a variety of different reasons, such as low levels of productivity in the economy, technological advancements, or even decreased demand levels.
Contrary to the general perception that price decline is a good thing, economy-wide price fall in the form of deflation is bad news. Deflation leads to greater purchasing power, which seems momentarily enticing.
However, in the long term, it can lead to inevitable recession and tough economic times. Deflation also impacts employment and income, interest rates, and spending.
Why are Economists Afraid of Deflation?
Economists are afraid of deflation because of its potential to make debt relatively expensive. This kickstarts a downward spiral because lower interest rates lead to fewer loans and hence lesser new money, thereby putting even more pressure on monetary deflation and so on.
But on a deeper look, it becomes clear that this problem due to deflation arises only because fiat currency is flexible. This is exactly what some cryptocurrencies are providing relief from.
Apart from users losing cryptos by sending them to non-compatible addresses or losing the password to their wallet, these cryptos allow users to voluntarily burn their coins.
This helps drive deflationary properties by systematically reducing the total circulating supply, and helps to retain as well as augment the market density of these currencies.
Cryptocurrencies that Have No Problem with Deflation
Bitcoin has a cap of 21 million coins in existence, and follows a gradually reducing emission rate to ensure users that there will never be any sudden increase in supply, or “supply shock”. Prophecy has an in-place contracting supply model of Burning to stabilize demand. BOMB has kicked off a trend of Ethereum-based deflationary tokens, ensuring that 1% of all tokens used are destroyed in every BOMB transaction.
SIN system economy’s utmost goal is fighting emissions while incentivizing the users. The circulating supply of SINOVATE has not increased in 2 years.
At the same time, as the circulating SIN coin supply decreases, the selling pressure for the digital asset also weakens on the open trading market.
The SINOVATE project has implemented the Proof-of-Burn (PoB) mechanism to burn the coins used for the collateral whenever users set up a new masternode.
The SIN System Economy (SSE) consists of:
– Burning all the transaction fees in the network.
– Burning all the governance proposals and voting fees.
– Burning the collateral coins of the Infinity Nodes.
– Burning all the decentralized cloud fees.
As a result, the instant circulating supply depends on network equilibrium between coin emissions and load of the ecosystem. More network utilization here means less circulating supply and vice versa, which means growth equals scarcity on SIN coins.
What these cryptocurrencies have essentially made clear is that deflation is a problem only in the world of pyramid money.
The decentralization and reduction in emission rates together with the feature of burning make these cryptocurrencies more suitable for the masses and not just corporates.
Proponents see limitless potential because these cryptocurrencies do not just remain unaffected by global deflation but also offer a viable solution to the deflationary spiral.