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What is the mechanism of deflation (how is deflation formed)?

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What is the mechanism of deflation? The mechanism of deflation (revenue suppres

What is the mechanism of deflation (how is deflation formed)?

What is the mechanism of deflation? The mechanism of deflation (revenue suppression) is an important factor in the cryptocurrency market. With the emergence of Bitcoin, each node in the blockchain network has its own tokens as a means of payment for transactions and settlements, which has led to tremendous growth in the entire crypto market over the past few months.

Despite these differences, it also affects the development of the crypto industry: Does this situation change when people use different cryptocurrencies to purchase certain assets? What is inflation or deflation? What is deflationary policy, deflation mechanism, and how can they be used in tokenomics? What makes inflation possible? What is currency scarcity? What does liquidity mean? Currency is a programmable currency. As each unit is considered a separate ledger characterized by a set of specific digital markers, its value can be created and determined by multiple entities. Therefore, inflation refers to the transfer of ownership of a certain type of asset from the existing financial system to a new, unrelated protocol. Inflation has nothing to do with prices, but with the extent of supply reduction or inflation rate reduction. If demand increases or supply is imbalanced, inflation will occur, but if supply decreases, inflation will not continue. This is why we often see some projects choose to incentivize holders through deflation or in other ways to provide market liquidity through deflationary sales. For example, in DeFi, the total market value of many projects is only around several hundred billion dollars, which makes them unable to remain competitive or attract more users to enter the market. Inflation is also called price increase or cost of production. However, for those interested in inflation, this indicator may not necessarily help them understand the economic models of deflation. Simplistically speaking, in deflationary economics, “deflation” refers to the situation where the more currency there is in a certain period of time, the less income it brings: “deflation” means “poverty,” that is, deflation gives it more control. “Lack of” (pealth), that is, inflation is usually a dynamic phenomenon because they determine its output. The theory of deflation assumes that in certain situations, most people know that the path to the future is tortuous.” However, in the current situation, these solutions may bring problems:

First, all participating crypto communities will find a novel approach, which allows everyone to have their own unique form of currency and then obtain the upper limit of currency circulation supply in a more stable and flexible manner.

Second, deflation actually means locking up more funds, thus limiting the speed of liquidity release. In this way, with the influx of capital, the risk of the system will increase. On the other hand, in order to achieve the above goals, inflation should have greater flexibility and validity, and its allocation strategy must be continuously adjusted.

Finally, to achieve this, a whole new economic system needs to be established. This model relies on the consensus reached among a series of different organizations, including companies, fund managers, and donors.

How is deflation formed?

So how is deflation formed?

Bitcoin has been in an upward trend recently, after experiencing a bull market. However, looking at the recent market sentiment, the current market sentiment is still relatively optimistic, and there is a risk of further decline in this upward trend; and according to statistical data, the overall market scale of the entire cryptocurrency this year is still very sluggish (because the market has seen many new projects and products); and as time goes by, the trading enthusiasm in the market has also started to decline. So it seems unlikely that this situation will last for a long time.

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