Deflationary model

Understanding the Deflationary Model in Cryptocurrency

In early 2025, DAGS adopted a deflationary model, a monetary approach that systematically reduces token supply over time. Unlike inflationary cryptocurrencies, which have mechanisms that increase supply (such as continuous mining or staking rewards), deflationary cryptocurrencies are designed to become scarcer over time.

Inflation vs. Deflation in Economics and Cryptocurrencies

To understand deflationary cryptocurrencies, it’s important to first grasp the broader economic principles of inflation and deflation:

Inflation occurs when the total supply of money or assets increases, reducing purchasing power over time. This often leads to higher prices, as seen with traditional fiat currencies when central banks print more money.

Deflation is the opposite — it happens when supply decreases, leading to increased purchasing power and potential price appreciation due to scarcity.

In traditional finance, controlled inflation (e.g., 2% per year) is often seen as beneficial for economic growth. However, excessive inflation devalues savings and wages. In contrast, assets with fixed supply, such as Bitcoin with its supply of 21 million coins, are valued for their scarcity, making them attractive as long-term stores of value.

Deflationary cryptocurrencies take this principle further by actively reducing supply over time through mechanisms like token burns, which permanently remove tokens from circulation.

Advantages of Deflationary Models

Value Appreciation By design, deflationary tokens increase in value as supply decreases, assuming demand remains stable or grows. This makes them attractive speculative investments.

Scarcity Factor Similar to Bitcoin’s capped supply, deflationary models rely on digital scarcity to attract investors looking for long-term gains.

Incentivized Holding As supply reduces, users are encouraged to HODL rather than sell, decreasing sell pressure and potentially leading to price stability.

Challenges of Deflationary Models

Volatility Risks While deflation reduces supply, market demand remains unpredictable, which can lead to significant price swings. This is a common challenge across all non-stable cryptocurrencies.

Sustainability Issues Some deflationary models rely solely on transaction-based burns, which may not be sustainable if transaction volume declines. A robust deflationary model should include additional incentives for users to hold and participate in the ecosystem.

Reduced Economic Activity If token holders prioritize long-term price appreciation over spending, it could slow usability growth. However, in projects where store of value is the priority, this is a feature, not a flaw.

Limited Utility for Usability Deflationary models do not work well for stablecoins or payment-focused cryptocurrencies, as they conflict with the goal of maintaining a stable price.

Best Applications for Deflationary Cryptos - Store of Value

Similarly to gold or Bitcoin, deflationary cryptocurrencies perform best as stores of value rather than day-to-day payment methods.

Deflationary cryptocurrencies present a compelling alternative to traditional financial models, leveraging scarcity to drive value. However, they require careful economic design, sustainability planning, and strategic implementation to succeed. When well-executed, deflationary models can create long-term value and attract a dedicated community of users and investors.