Why we’re seeing more and more projects move to a deflationary model.
One of the most attractive propositions of the crypto market for institutional investment is the potential for an asset to be used as a hedge against inflation. As the stock market pumps itself up to dangerous levels, investment firms are looking for a safer place to store their capital. With most governments encouraging huge amounts of lending, interest rates are currently negative in most countries. This increase in lending means an increase in inflation which, in turn, means that there are no obvious ways to protect a firm’s capital.
The most obvious solution is to invest in assets that are inflation proof. Historically, by far the most common of these assets is gold. Gold is fungible, scarce and elemental. It can’t be created. It can’t be printed by a central government. It’s a material, physical asset that can only be mined.
However, in the digital era gold can seem a bit ponderous. The very thing that makes it valuable (its materiality) is also what makes it clumsy. It can’t be moved in the same way that modern money can. Crypto is the solution that provides the best of both worlds.
Nowhere is this more apparent than with Bitcoin. Of, Bitcoin is currently seeing more institutional investment than any other cryptocurrencies. This is primarily due to the fact that it is the oldest established cryptocurrency. Its protocol has stood up to more scrutiny, more attacks, more attempted manipulation than any other crypto asset and it has stood firm.
However, while Bitcoin is indeed inflation proof, it is not deflationary. There is a hard cap on the amount of Bitcoins that will ever be mined but this number will not decrease. There will be a number of Bitcoins taken out of circulation as a result of missing private keys. However, given we have reached the point that Bitcoin is widely regarded as a valuable investment long term, private keys will be better looked after.
There are some cryptos however, where the deflationary aspect is built into their protocols. The most famous of these is about to be, by far, Ethereum. ETH’s inflation after the PoS merge will reduce to under 1% annually (compared to Bitcoin’s 2% inflation as of the last halving). After Ethereum 1559 finally goes live, it will reduce to negative rates depending on usage.
In a recent report, JP Morgan concluded that Ethereum may constitute a better long term investment than Bitcoin. Ethereum’s utility and increased use case, when combined with a deflationary trend mean that there is more buying pressure built into the Ethereum protocol.
BNB, the native token of the Binance Smart Chain, has a buy and burn system that is legendary. Transaction fees from BSC are used to purchase back BNB. BSC is, however, a centralized system. The bought-back BNB is controlled by Binance who burn many of the tokens at the end of each quarter. Some of these burn events have proven to be absolutely huge. The largest of which took place back in April and saw about $595 million burnt.
However, the deflationary aspect of BNB will only continue until the BNB’s hard-cap has been reduced by 50% and only 100,000,000 BNB remain.
CSS Tokens are the native tokens of the CoinSwap Space DEX. Built on BSC, CoinSwap Space provides a suite of DeFI products that allows investors to provide liquidity and farm yield. It works in much the same way that Pancake Swap does whereby the native tokens are bought back with transaction fees accumulated from trading on the exchange. However, unlike CAKE tokens, CSS has a hard cap of only 19,999,999. This makes CSS tokens truly deflationary.
Holders of CSS tokens might also benefit from the low fees of the CoinSwap DEX. The exchange charges even less per transaction than PancakeSwap which could see more users coming onto the platform, which will in turn create more buying pressure on the token.
As the massive volatility in the market goes on the potential of a crypto bear market continues to loom. One thing is certain, crypto can survive a bear market. However, in such times, investors will be looking for different types of investments. Investing in deflationary assets may well be the key feature of such a market.