Deflationary Cryptocurrency: What is it, and why does it matter for TacoSwap?
Do cryptocurrencies have limits? This is a good question to start with. Let’s take Bitcoin as an example. Twenty-one million BTC is the maximum amount of Bitcoins that will ever exist. Once the block reward is zero, no new BTC will come into the market. Perhaps not being able to perceive this in itself isn’t such a huge deal to you, but economists are very worried about what happens in a currency system with a fixed supply.
The number of Bitcoin currently in circulation will decrease over time. All the Bitcoins owned by investors will be gone and will never be recovered if private keys continue to get lost. When Bitcoins decrease, the remaining coins will become more valuable. And, this doesn’t just apply to Bitcoins but all cryptocurrencies. Most cryptos set a limit on the total amount of coins that will ever be produced. With a fixed supply, cryptos with limits will never produce coins anymore if they hit the threshold.
So, what is deflation in crypto?
When speaking in macroeconomics, deflation generally goes hand in hand with a decrease in the money supply. However, prices are prone to fall due to a wide variety of reasons. In particular, prices are driven down by economic unproductivity, technological advancements, or a reduction in demand.
In reality, cryptocurrencies are the first example of a deflationary currency system in economic history. Most economists think that deflationary monetary systems are ideal in order to keep money from losing its value. This is why some economists argue that digital currencies may upend the global monetary system. However, many also think that a deflationary currency system would lead to hoarding and liquidity issues.
Deflation vs. Inflation
The value of real currencies diminishes over time because a central bank may print new money whenever they choose, and there is no limit to the amount of money they can produce. In the U.S., for example, a loaf of bread was priced at 0.09 USD in 1930, then moved up to 0.36 USD in 1970, and finally valued at 1.98 USD in 2013. Bread baking hasn’t become more costly than it was before. What makes the price higher isn’t the bread baking itself but the dollar losing its value over time.
In a fiat currency, the rarity of the currency diminishes because central banks create more money. Inflation occurs when the money supply grows, and people’s money loses value. In terms of the assumptions made in economics, it’s fair to say that all fiat currencies today are inflationary.
Bitcoin and other coins have no central bank that distributes currency like fiat currencies and controls monetary policy. There is an algorithm that creates coins based on their limits and then stops when the threshold is met. The total quantity of BTC and other coins will drop after that, indicating that lost cryptocurrencies will no longer be part of the money supply and, therefore, their value will continue to collapse over time.
Why deflation matters for TacoSwap?
The TacoSwap DeX adopted a deflationary model. Although the community has already voted for a 300M supply, the protocol wants to adapt this model for a good purpose. Instead of decreasing the supply drastically, TacoSwap DeX will limit the production of eTACO slowly.
It’s natural to attract liquidity providers by giving “free” token rewards to investors of TacoSwap. Without liquidity providers, no one will use its application for the fact that it doesn’t provide unique services. This will drive investors away and instead go to other decentralized exchanges. For TacoSwap, more liquidity means more traders. And more traders mean protocol development.
This is the reason why TacoSwap keeps a reasonable rewards schedule for liquidity providers. However, it’s required mostly during the initial stages of the platform for promotion. When a new decentralized exchange enters the market, promotion is necessary to attract investors and traders.
TacoSwap will follow a model where it issues decreasing eTACO tokens every month. For example, 90 eTACO per block this month, 80 next months, 70, 60…20, and then stop the drastic decrease.
“It would make a lot of sense to follow this model because if we would reduce rewards too fast, we might not get enough traction from liquidity miners and would get fewer traders, which will result in less development,” the team said.
