Inflation and deflation are two foundational concepts in macroeconomics. In the traditional sense, they are generally used for national-level macroeconomic regulation and are basic concepts that determine the supply rules of an entire nation-level market. Although they have some impact on ordinary people’s lives, at the conceptual level they seem to have nothing to do with ordinary people at all.

But in the crypto world, these two terms are frequently misused, abused, and even turned into marketing slogans.

• “Deflation = it will definitely go up”
  

• “Inflation = it will definitely go down”
  

These claims sound intuitive, but in real markets they get disproven again and again. In fact, within blockchain and crypto-asset systems, inflation / deflation is not a simple change in quantity, but an entire dynamic game model among “supply — incentives — security — demand.”

What it determines is not short-term price, but whether a network can survive, run for a long time, and run steadily.

This article will start from the underlying logic and systematically break down inflation and deflation models in the crypto world, helping you truly understand:

• What kind of inflation is “healthy”?
  

• What kind of deflation is “pseudo-deflation”?
  

• Why Bitcoin is not simply a “deflationary asset”?
  

• Why many projects that claim to be “extremely deflationary” are actually more likely to die?

In the context of traditional finance: inflation usually means an increase in money supply and a decrease in purchasing power, while deflation means a decrease in money supply and an increase in purchasing power. But in crypto systems, this definition is far from enough.

In the blockchain world, inflation / deflation involves at least four dimensions:

• Token supply rules
  

• Token distribution targets
  

• Token use cases
  

• Network security and incentive structure
  

If you only stare at “how many more tokens are issued each year / how many are burned,” while ignoring the other dimensions, you will reach completely wrong conclusions. Of course, many “small workshop” projects also tend to tie these two concepts to how many tokens they issue / how many they burn.

Take Bitcoin as an example. Its fixed total supply of 21 million coins is often mistaken as “absolute deflation,” but in reality, the early block reward mechanism produced through mining was a typical inflationary model in the initial stage—each block produced 50 bitcoins, halving every four years. This rule is explicitly written into the code and forms the foundational logic of token supply.

However, looking only at supply rules is not enough. The distribution targets are equally critical. Bitcoin’s mining rewards are distributed to miners who maintain network security. They obtain tokens through hashpower competition. After these tokens enter the market, some may be held long-term, while others are used for trading or payment, forming a cycle of “distribution — circulation — accumulation.”

Then look at the use cases. As the consensus of Bitcoin as “digital gold” gradually strengthens, its application scenarios in cross-border payments, value storage, and other areas continue to expand. Even when supply growth slows down, growth in demand may offset the inflationary pressure from the supply side, and may even push up its market price. This reflects the importance of use cases in determining the real effects of an inflation model.

In blockchains, inflation is first and foremost an incentive mechanism, not a monetary policy mistake. Most public chains choose an inflation model for a very realistic core reason: without continuous incentives, there are no nodes → without nodes, there is no security → without security, there is no value at all.

Inflation mainly serves three functions:

• Paying security costs (miners / validators)
  

• Incentivizing ecosystem participants (developers, stakers, users)
  

• Guiding early network growth
  

For example:

• Bitcoin’s block rewards
  

• Ethereum’s block issuance + staking rewards
  

• The staking APR of PoS public chains
  

These are essentially systemic inflation, not “random token printing.”

Not all inflation is the same. Inflation can be proactive and healthy, or passive and out of control.

Healthy inflation usually has the following characteristics:

• Inflation rate is predictable and verifiable
  

• Inflation has a clear purpose (security / incentives)
  

• Inflation is related to network usage intensity
  

• Inflation rate gradually declines over time
  

Bitcoin’s halving mechanism and Ethereum’s gradually decreasing issuance curve both belong to this category.

Typical signs of runaway inflation:

• High inflation persists long-term
  

• Inflation primarily flows to the team or early capital
  

• There is no real demand to absorb it
  

• Network security is not improved as a result
  

This kind of inflation is essentially value transfer, not value creation.

A reasonable inflation design, such as moderate block rewards, can continuously incentivize miners to invest hashpower to maintain the secure operation of the blockchain network and prevent security threats such as 51% attacks. If one blindly pursues “zero inflation” or even “deflation,” and cuts or cancels miner rewards too early, it may cause hashpower to leave, which will weaken network security instead and ultimately damage the value foundation of the entire ecosystem.

Therefore, the “inflation model” in the crypto world is the result of the interaction and dynamic balance among four dimensions: supply rules, distribution targets, use cases, and the network security incentive structure. Any one-dimensional interpretation cannot fully understand its essence.

If inflation is misunderstood as a “bad thing,” then deflation is almost mythologized as a “universal cure.” If you frequently engage with new projects, you will find that many of them will say something like: “Our project has a deflation mechanism!” As if having this deflation mechanism automatically means the project is absolutely healthy.

The core logic of a deflation mechanism seems simple and direct: reduce circulating supply by continuously burning tokens, and theoretically, if demand remains unchanged, reduced supply will push token prices up.

This expectation of “buy it and it will go up” is extremely attractive to investors, and it leads many project teams to treat it as a marketing focus and deliberately create a “scarcity” narrative. However, deflation is not magical alchemy. Its actual effects depend heavily on the fundamentals of the project and the design logic of the burn mechanism.

First, simple token burning detached from real value support and real use cases—if a project itself produces no actual revenue, has low user activity, and solves no real-world problems, and relies only on periodically burning some tokens to “manufacture scarcity,” then this scarcity is artificial and fragile, and it is difficult to sustainably support long-term token price appreciation.

Once market sentiment shifts, or the short-term stimulus effect of burning fades, the price can easily experience cliff-like declines. Because such deflation does not create new value; it only performs a redistribution of wealth among existing token holders. It may even cause the project team to focus excessively on token price rather than the project’s development, neglecting core technical R&D and ecosystem building.

Second, deflation models may suppress token circulation and usage. If the market widely expects the token to continue deflating and appreciating, holders may be more inclined to hoard tokens for long periods rather than use them for daily trading, payments, or participation in ecosystem activities. This reduces velocity and weakens liquidity. For a crypto asset that is supposed to function as a medium of exchange or a unit of account, excessive deflation may instead cause it to lose its basic monetary function, which is not conducive to ecosystem prosperity and expansion.

Imagine if people are unwilling to spend the tokens they hold because they fear the token will be worth more tomorrow—then the trading ecosystem, DeFi applications, NFT markets, and so on built on that token will struggle to operate effectively. The entire ecosystem may gradually become rigid due to the lack of “blood flow.”

Third, some projects’ deflation mechanism designs have a problem of “deflation for the sake of deflation,” and may even hide potential harm to ordinary investors. For example, some projects’ burn rules may tilt toward early investors, the team, or the foundation: they can obtain large amounts of tokens at low cost, sell part of them in the market, and then use a small portion of the profits to burn tokens, creating the illusion of deflation to push prices higher, making it easier for them to dump more of their holdings.

This kind of “left hand to right hand” game is often paid for by ordinary investors who enter later. Some projects also use a portion of transaction taxes/fees for burning. This increases user transaction costs to some extent, and in the long run may reduce users’ willingness to trade—especially unfriendly to high-frequency traders and small retail trades—thereby potentially suppressing market activity.

More importantly, a deflation model cannot solve a project’s fundamental problems. If a project faces code vulnerabilities, governance chaos, an inactive team, or a breakdown of community consensus, then even the most perfect deflation mechanism cannot save it from failure. If investors blindly believe in deflation while ignoring key factors such as the whitepaper, team background, technical capabilities, community ecosystem, and competitive landscape, they can easily fall into an investment trap.

Deflation is only a tool. It cannot by itself grant value to a project. What truly determines a project’s success or failure is still whether it can create unique value, meet real demand, and build a healthy and sustainable ecosystem. Therefore, treating a deflation mechanism as an absolute standard and believing that as long as there is deflation the project is guaranteed to succeed and the token price will rise is undoubtedly falling into another cognitive misunderstanding.

The most typical representative: Bitcoin

• Total supply of 21 million
  

• New issuance keeps decreasing
  

• Long-term supply approaches zero
  

But note: Bitcoin’s “deflation” is not achieved by burning, but by “slowing issuance.”

Common in exchange tokens and application tokens:

• Buyback-and-burn from trading fees
  

• Use-and-burn
  

• A portion of revenue used for burn
  

Examples: BNB, ETH (EIP-1559), and some DeFi tokens. The problem is: burning requires “sufficient real usage,” otherwise it is just a numbers game.

Typical characteristics:

• Claims “extreme deflation”
  

• Actual supply still increases, or can be arbitrarily increased through contract privileges
  

• Burn scale is far smaller than the release scale
  

Such projects often perform brightly in the early stage of a bull market, but are extremely prone to collapse when liquidity contracts.

A severely overlooked fact is: excessive deflation can destroy network security and ecosystem vitality. If the token becomes increasingly scarce and circulation becomes increasingly limited:

• Users are unwilling to spend
  

• Node revenue becomes insufficient
  

• Security budget declines
  

• The cost of attacking the network decreases
  

The final result is: price may rise in the short term, but the system becomes unsustainable in the long term.

Truly mature crypto systems are almost never “pure inflation” or “pure deflation,” but rather:

• Inflation is responsible for security and incentives
  

• Deflation is responsible for value recycling and efficiency improvement
  

A typical example: Ethereum

• Ensures security through block rewards + staking (inflation)
  

• Recycles value through gas burning (deflation)
  

• Under high usage, it can even become “net deflationary”
  

This is a dynamic balance model, not a simple ideological stance.

In the crypto world, inflation is not original sin, and deflation is not a belief system. They are simply tools—tools used by network designers to balance security, incentives, growth, and value capture through different means. What truly matters is not “whether the token will become fewer,” but whether this system is worth being used in the long term.

This is the most essential question behind inflation / deflation models.

Inflation and deflation are two foundational concepts in macroeconomics. In the traditional sense, they are generally used for national-level macroeconomic regulation and are basic concepts that determine the supply rules of an entire nation-level market. Although they have some impact on ordinary people’s lives, at the conceptual level they seem to have nothing to do with ordinary people at all.

But in the crypto world, these two terms are frequently misused, abused, and even turned into marketing slogans.

• “Deflation = it will definitely go up”
  

• “Inflation = it will definitely go down”
  

These claims sound intuitive, but in real markets they get disproven again and again. In fact, within blockchain and crypto-asset systems, inflation / deflation is not a simple change in quantity, but an entire dynamic game model among “supply — incentives — security — demand.”

What it determines is not short-term price, but whether a network can survive, run for a long time, and run steadily.

This article will start from the underlying logic and systematically break down inflation and deflation models in the crypto world, helping you truly understand:

• What kind of inflation is “healthy”?
  

• What kind of deflation is “pseudo-deflation”?
  

• Why Bitcoin is not simply a “deflationary asset”?
  

• Why many projects that claim to be “extremely deflationary” are actually more likely to die?

In the context of traditional finance: inflation usually means an increase in money supply and a decrease in purchasing power, while deflation means a decrease in money supply and an increase in purchasing power. But in crypto systems, this definition is far from enough.

In the blockchain world, inflation / deflation involves at least four dimensions:

• Token supply rules
  

• Token distribution targets
  

• Token use cases
  

• Network security and incentive structure
  

If you only stare at “how many more tokens are issued each year / how many are burned,” while ignoring the other dimensions, you will reach completely wrong conclusions. Of course, many “small workshop” projects also tend to tie these two concepts to how many tokens they issue / how many they burn.

Take Bitcoin as an example. Its fixed total supply of 21 million coins is often mistaken as “absolute deflation,” but in reality, the early block reward mechanism produced through mining was a typical inflationary model in the initial stage—each block produced 50 bitcoins, halving every four years. This rule is explicitly written into the code and forms the foundational logic of token supply.

However, looking only at supply rules is not enough. The distribution targets are equally critical. Bitcoin’s mining rewards are distributed to miners who maintain network security. They obtain tokens through hashpower competition. After these tokens enter the market, some may be held long-term, while others are used for trading or payment, forming a cycle of “distribution — circulation — accumulation.”

Then look at the use cases. As the consensus of Bitcoin as “digital gold” gradually strengthens, its application scenarios in cross-border payments, value storage, and other areas continue to expand. Even when supply growth slows down, growth in demand may offset the inflationary pressure from the supply side, and may even push up its market price. This reflects the importance of use cases in determining the real effects of an inflation model.

In blockchains, inflation is first and foremost an incentive mechanism, not a monetary policy mistake. Most public chains choose an inflation model for a very realistic core reason: without continuous incentives, there are no nodes → without nodes, there is no security → without security, there is no value at all.

Inflation mainly serves three functions:

• Paying security costs (miners / validators)
  

• Incentivizing ecosystem participants (developers, stakers, users)
  

• Guiding early network growth
  

For example:

• Bitcoin’s block rewards
  

• Ethereum’s block issuance + staking rewards
  

• The staking APR of PoS public chains
  

These are essentially systemic inflation, not “random token printing.”

Not all inflation is the same. Inflation can be proactive and healthy, or passive and out of control.

Healthy inflation usually has the following characteristics:

• Inflation rate is predictable and verifiable
  

• Inflation has a clear purpose (security / incentives)
  

• Inflation is related to network usage intensity
  

• Inflation rate gradually declines over time
  

Bitcoin’s halving mechanism and Ethereum’s gradually decreasing issuance curve both belong to this category.

Typical signs of runaway inflation:

• High inflation persists long-term
  

• Inflation primarily flows to the team or early capital
  

• There is no real demand to absorb it
  

• Network security is not improved as a result
  

This kind of inflation is essentially value transfer, not value creation.

A reasonable inflation design, such as moderate block rewards, can continuously incentivize miners to invest hashpower to maintain the secure operation of the blockchain network and prevent security threats such as 51% attacks. If one blindly pursues “zero inflation” or even “deflation,” and cuts or cancels miner rewards too early, it may cause hashpower to leave, which will weaken network security instead and ultimately damage the value foundation of the entire ecosystem.

Therefore, the “inflation model” in the crypto world is the result of the interaction and dynamic balance among four dimensions: supply rules, distribution targets, use cases, and the network security incentive structure. Any one-dimensional interpretation cannot fully understand its essence.

If inflation is misunderstood as a “bad thing,” then deflation is almost mythologized as a “universal cure.” If you frequently engage with new projects, you will find that many of them will say something like: “Our project has a deflation mechanism!” As if having this deflation mechanism automatically means the project is absolutely healthy.

The core logic of a deflation mechanism seems simple and direct: reduce circulating supply by continuously burning tokens, and theoretically, if demand remains unchanged, reduced supply will push token prices up.

This expectation of “buy it and it will go up” is extremely attractive to investors, and it leads many project teams to treat it as a marketing focus and deliberately create a “scarcity” narrative. However, deflation is not magical alchemy. Its actual effects depend heavily on the fundamentals of the project and the design logic of the burn mechanism.

First, simple token burning detached from real value support and real use cases—if a project itself produces no actual revenue, has low user activity, and solves no real-world problems, and relies only on periodically burning some tokens to “manufacture scarcity,” then this scarcity is artificial and fragile, and it is difficult to sustainably support long-term token price appreciation.

Once market sentiment shifts, or the short-term stimulus effect of burning fades, the price can easily experience cliff-like declines. Because such deflation does not create new value; it only performs a redistribution of wealth among existing token holders. It may even cause the project team to focus excessively on token price rather than the project’s development, neglecting core technical R&D and ecosystem building.

Second, deflation models may suppress token circulation and usage. If the market widely expects the token to continue deflating and appreciating, holders may be more inclined to hoard tokens for long periods rather than use them for daily trading, payments, or participation in ecosystem activities. This reduces velocity and weakens liquidity. For a crypto asset that is supposed to function as a medium of exchange or a unit of account, excessive deflation may instead cause it to lose its basic monetary function, which is not conducive to ecosystem prosperity and expansion.

Imagine if people are unwilling to spend the tokens they hold because they fear the token will be worth more tomorrow—then the trading ecosystem, DeFi applications, NFT markets, and so on built on that token will struggle to operate effectively. The entire ecosystem may gradually become rigid due to the lack of “blood flow.”

Third, some projects’ deflation mechanism designs have a problem of “deflation for the sake of deflation,” and may even hide potential harm to ordinary investors. For example, some projects’ burn rules may tilt toward early investors, the team, or the foundation: they can obtain large amounts of tokens at low cost, sell part of them in the market, and then use a small portion of the profits to burn tokens, creating the illusion of deflation to push prices higher, making it easier for them to dump more of their holdings.

This kind of “left hand to right hand” game is often paid for by ordinary investors who enter later. Some projects also use a portion of transaction taxes/fees for burning. This increases user transaction costs to some extent, and in the long run may reduce users’ willingness to trade—especially unfriendly to high-frequency traders and small retail trades—thereby potentially suppressing market activity.

More importantly, a deflation model cannot solve a project’s fundamental problems. If a project faces code vulnerabilities, governance chaos, an inactive team, or a breakdown of community consensus, then even the most perfect deflation mechanism cannot save it from failure. If investors blindly believe in deflation while ignoring key factors such as the whitepaper, team background, technical capabilities, community ecosystem, and competitive landscape, they can easily fall into an investment trap.

Deflation is only a tool. It cannot by itself grant value to a project. What truly determines a project’s success or failure is still whether it can create unique value, meet real demand, and build a healthy and sustainable ecosystem. Therefore, treating a deflation mechanism as an absolute standard and believing that as long as there is deflation the project is guaranteed to succeed and the token price will rise is undoubtedly falling into another cognitive misunderstanding.

The most typical representative: Bitcoin

• Total supply of 21 million
  

• New issuance keeps decreasing
  

• Long-term supply approaches zero
  

But note: Bitcoin’s “deflation” is not achieved by burning, but by “slowing issuance.”

Common in exchange tokens and application tokens:

• Buyback-and-burn from trading fees
  

• Use-and-burn
  

• A portion of revenue used for burn
  

Examples: BNB, ETH (EIP-1559), and some DeFi tokens. The problem is: burning requires “sufficient real usage,” otherwise it is just a numbers game.

Typical characteristics:

• Claims “extreme deflation”
  

• Actual supply still increases, or can be arbitrarily increased through contract privileges
  

• Burn scale is far smaller than the release scale
  

Such projects often perform brightly in the early stage of a bull market, but are extremely prone to collapse when liquidity contracts.

A severely overlooked fact is: excessive deflation can destroy network security and ecosystem vitality. If the token becomes increasingly scarce and circulation becomes increasingly limited:

• Users are unwilling to spend
  

• Node revenue becomes insufficient
  

• Security budget declines
  

• The cost of attacking the network decreases
  

The final result is: price may rise in the short term, but the system becomes unsustainable in the long term.

Truly mature crypto systems are almost never “pure inflation” or “pure deflation,” but rather:

• Inflation is responsible for security and incentives
  

• Deflation is responsible for value recycling and efficiency improvement
  

A typical example: Ethereum

• Ensures security through block rewards + staking (inflation)
  

• Recycles value through gas burning (deflation)
  

• Under high usage, it can even become “net deflationary”
  

This is a dynamic balance model, not a simple ideological stance.

In the crypto world, inflation is not original sin, and deflation is not a belief system. They are simply tools—tools used by network designers to balance security, incentives, growth, and value capture through different means. What truly matters is not “whether the token will become fewer,” but whether this system is worth being used in the long term.

This is the most essential question behind inflation / deflation models.