What is a deflationary token model and why is it beneficial?
Most cryptocurrencies on the market have a limited supply, which guarantees the “finality” of the currency.
More on the example of BTC: the protocol stipulates that the total number of tokens can never exceed 21 million bitcoins, which gradually enter the network, with each halving the amount of token production is halved. It is estimated that another 3.7 million BTC was lost along with private keys.
The model is created in which the demand for a limited asset becomes higher, more people redeem Bitcoin, which irrevocably leads to an increase in the asset.
What is a deflationary token?
In addition to the limited emission, these tokens also have a burn, buyback or other way to reduce the total number of tokens. Thus, an artificially limited supply is created and an interest in the buyout is ensured and, accordingly, in the medium and long term, an increase in prices.
When a token burn occurs, a certain amount of cryptocurrency is permanently removed from circulation. It turns out that the burning of tokens is an irreversible procedure, since it will no longer be possible to issue or print banknotes again, as is the case with fiat.
How are coins burned?
When tokens are burned, a certain amount of cryptocurrency is permanently removed from circulation. Burning is often understood as moving tokens to a public wallet (also called a “consumer address”) from which those tokens can never be retrieved.
Another type of quantity reduction is the “buy back” model, which is implemented in the WELD token. A buyback is a procedure when a team buy back a part of the tokens from the public turnover from the profit generated by the project. The redeemed tokens are placed in an “insurance fund” to provide coverage for losses, for example, when a protocol is hacked.
Both of these models reduce supply, while demand grows as users grow.
This increases the pressure of buyers and the price of the asset is growing.
In addition, “buy back” is a way for issuers to ensure business transparency to their investors.
Which tokens are deflationary?
Coin’s burning is very popular among cryptocurrency exchanges that have issued their own tokens. While the coin utility encourages traders to use tokens, burning coins creates an additional incentive to buy and hold them for a longer period of time.
For example, Binance uses 20% of its profits to buy and burn Binance Coin (BNB) tokens every quarter to reduce the supply of BNB in circulation. Binance has committed to continue this process until 50% of the total BNB supply is burned.
This pattern has driven the price of BNB by >1500% in 2021.
The FTX crypto derivatives exchange has taken it one step further. Every week, FTX buys back and burns its own FTX Token (FTT) exchange-traded token, funded by 33% of the fees generated in the platform markets, 10% of the net replenishment of the insurance fund and 5% of fees received from other uses of its platform.
How does WELD deflation work?
Weld Money is actively developing its card product, after the public launch of the weld card, 10% of the profit from transactions is sent to buy back WELD tokens and place them in an insurance fund.
Let’s look at an example of how this affects the price of a token. According to market estimates, each active card user brings the issuer $12–15 per month, taking into account the cost of its maintenance, 10% of the profit will be ~$1.3, which will go to the “buy back”. This means that 100k active users generate $130,000 monthly buybacks, which, given the current liquidity of the WELD token on the DEX, can lead to an increase of 25–50% monthly.
Added to this is the organic interest of speculators and users who buy WELD for use in the application and ecosystem. There are several such token user cases:
⁃ Crypto card issuance
⁃ Map Level Up
⁃ Monthly maintenance fee
- Payment of commission
⁃ Referral program
⁃ Crypto lending
⁃ Various insurances
⁃ Other financial instruments
Deflationary currencies are an ambitious experiment in the crypto industry.
While major fiat currencies are based on an inflationary model to encourage spending, cryptocurrencies use deflationary mechanisms to maintain stable growth in value to encourage users to hold coins and use them to hedge in the general market.