What is the Deflation Model (How is Deflation Formed)?

What is the deflation model? Editor’s note: This article is from Bit information (ID: bitcoin8btc), author: Alexander Behrens, translator: Overnight Porridge.

In the cryptocurrency market, the deflation model is a feasible solution to meet the liquidity needs of assets, which are usually achieved through protocols that increase supply or decrease demand to generate profit. What is the deflation model? What is the inflation model? The principles of inflation and scarcity economics are the same. They both have a common characteristic – a never-ending cycle. When we consider a new economic model – that is, as time passes – deflation occurs when the total issuance of tokens becomes larger and larger. This means that any new, faster new token will be mined and gain more returns from this ecosystem. This mechanism allows assets to continue to grow. Why is there such a problem? Because there are no new products appearing, prices cannot sustain as before. If we want to continue investing in something, there must be more capital entering it. So we need to build a better infrastructure that has enough products to use and trade in the market. Therefore, let’s see how to build a reasonable model.

The first thing to understand is – like the structure of most other asset classes, the inflation model will provide greater value to investors – but it doesn’t mean that only the price of Bitcoin will rise! That’s why I think deflation is an important concept. For most financial markets, deflation is necessary because it provides funds and eliminates the imbalance between supply and demand, without causing losses due to short-term fluctuations. Will the inflation model make the long-term prospects of assets more optimistic?

To help explain this, let’s assume two examples: In the first case, people want to hold one asset while they want to hold another asset; the second case shows that over time, the asset may lose all its value. Then we start looking for another option, in this case, everyone is trying to find their own wallet address or they are trying to buy something. The end result may be like this:

1. The total market value of the Bitcoin network reaches 1 trillion US dollars, making Bitcoin a powerful reserve asset. 2. The entire Bitcoin network has a circulation of about 1 billion Bitcoins. 3. Miners have mined about 50,000 Bitcoins in the past few months, almost doubling this number. 4. What is the “market share currently occupied by Bitcoin”? “One of Bitcoin’s main functions is as a store of value. It also includes ‘bored apes.’ It is neither currency nor commodity: ‘Bitcoin cash is still useful.’ However, ‘Bitcoin is now also part of the limited resources,’ he said, ‘but you may not know what it will be like in the future,’ he added. ‘Bitcoin has developed tremendous potential, especially in the next few years, its efficiency will be significantly improved.’

How Deflation is Formed

How is deflation formed? How is inflation generated? It is the constant tightening of the market and the change in the relationship between supply and demand that leads to increasingly imbalanced prices. All of this is because the supply is too balanced (insufficient demand), and when the supply decreases, there will be a decrease in demand. So what we see in this situation is called “increasing demand,” that is, the supply continues to increase; but if the growth rate of demand is slow and difficult to control, there will naturally be a phenomenon of price decline or increased inflation rate (as shown in the figure).

So the question is: why is there deflation? The reason is simple, people’s demand for the economy is gradually increasing (including the US government, etc.), and over time there will inevitably be a certain inflation rate (such as the Federal Reserve and the People’s Bank of China) exceeding their issuance, thus causing a scarcity of money. In other words, the depreciation of currency, the bubble of assets, and the influence of other factors make it more difficult for capital to flow in.