How Does Deflationary Token Work?

What are Deflationary Tokens?

A deflationary token is a token model in which a specific percentage of tokens are removed from the market every time a token transfer takes place. Its main objective is to create a demand for a token by decreasing its supply in the market. It prevents the market from being flooded with an excessive supply of tokens. This has made the supply of these tokens remains the same even if the demand increases.

Working Mechanism of Deflationary Tokens:

The process of burning these tokens is mainly carried out through two different mechanisms. They are as follows,

i) Buy Back

ii) Burn on transaction

Buy Back Mechanism

In today’s crypto world, this mechanism is essential to drive up the value of shares in the market. In this Buy back mechanism, a project removes a particular amount of its tokens from the market by sending them to a dead address, thus eliminates those tokens permanently. Later, the same company or the project repurchase an amount of those burnt tokens using its very own funds and save those in their wallets. This creates a demand for those tokens in the market and affects their price.

Burn on Transaction

In this mechanism, a particular amount of tokens from the sender account is burnt and thus led to a decreased supply of token in the blockchain. Here the Burn function can be used by any user who owns a token. This mechanism depends on the overall volume of the tokens. The more the trading volume is, the more tokens will be removed from the supply. The major advantage of this method is that it maintains a constant demand due to the removal of tokens in a regular interval.

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