The foundation of any cryptocurrency project especially when designing their tokenomics is its token model. They affect the liquidity, long-term value, and also their user behavior. Selecting which token model suits their project best is a crucial choice for Web3 founders. It can affect both the growth and achievement of the project itself.

Token supply is one of the critical components in token model selection. This is due to its potential to directly impact both demand and market dynamics. An example is a project that wants to support its network activities. Such a project needs to choose an inflationary token supply, as it can increase the total number of tokens. Conversely, if the project wants to limit or reduce the supply because it wants to maintain value. Such a project would need to choose a deflationary token supply.

Each of these token supply models has a different purpose. Inflationary tokens are more likely to encourage participation and liquidity. In contrast, deflationary tokens tend to support value retention and the long-term value of the token or project itself.

This article will help Web3 founders to access information about these types of token supply. That way, web3 founders can choose the best token model for their project.

Inflationary Token

What is an Inflationary Token?

Inflationary tokens are a type of token supply where the supply will increase over time. New tokens will be issued through mining, staking rewards, or validator payments on a regular basis. This inflationary token system helps keep the network active and ensures that contributors will always be rewarded.

As explained earlier, an increased supply of tokens of this type means that more tokens will enter the market. This results in increased liquidity. Therefore, users can easily access tokens for trading, transactions, or other activities without worrying about token scarcity. This makes inflationary tokens a practical choice for everyday use and transactions.

Besides all the advantages, inflationary tokens also have a downside. With so much supply in the market, if not matched by enough demand, the value of tokens may decline over time. Inflation can weaken the appeal of holding tokens for long-term gains.

What Are The Inflationary Token Examples?

Dogecoin (DOGE)

• There is no supply cap on Dogecoin.

• New tokens are constantly created by miners as block rewards.

• This unlimited issuance helps maintain liquidity but weakens long-term scarcity and value.

Solana (SOL)

• Solana rewards validators with new tokens through staking.

• The network is secured and participation is encouraged by this system.

• Continuous issuance, however, increases the supply in circulation, which could have an effect on price growth.

Polkadot (DOT)

• Polkadot offers nominators and validators staking rewards.

• To maintain the network's effectiveness, these incentives are necessary.

• However, token owners may experience dilution as the supply grows.

Inflationary Token: Pros and Cons

Pros for Inflationary Token

• Encourages user activity and participation
  Active users receive tokens on a regular basis, which encourages positive network activity and keeps users interested.

• Improves liquidity
  The availability of tokens for trading, spending, and staking is guaranteed by an expanding supply. This promotes ecosystem use and lessens friction.

• Supports ecosystem growth
  The network attracts new users and validators with ongoing rewards, which promotes community growth.

Cons for Inflationary Token

• Risk of value dilution
  If demand does not increase at the same rate as new tokens enter the market, the value of each token may decrease.

• Lower appeal for long-term holders
  Due to the ongoing supply growth, investors hoping for price growth might steer clear of inflationary tokens.

• May cause price instability
  Unbalanced demand and excessive supply growth can lead to volatility and downward price pressure.

Deflationary Token

What is A Deflationary Token?

Deflationary tokens are tokens whose supply will always decrease. Deflationary tokens also mean that the supply of tokens has a strict limit over time. While they will continue to decrease, the supply of these tokens has a limit. Mechanisms such as token burning, buybacks, or restricted issuance will help reduce the total number of tokens available in the market. We can refer to this as a controlled or reduced supply of tokens.

However, over time, this reduced supply of tokens can lead to scarcity. Scarcity can favor price appreciation, especially if demand increases. Deflationary tokens are often preferred by investors who value long-term holdings and price stability.

However, reducing supply can also pose challenges. If there are fewer tokens circulating in the market, this may limit liquidity and may make it harder for users to transact freely.

Read also: Token Burning Mechanisms

What Are The Deflationary Token Examples?

Bitcoin (BTC)

• Bitcoin has a fixed supply of 21 million tokens.

• Every four years, fewer new tokens are issued due to halving events.

• Its store-of-value appeal is frequently attributed to the scarcity created by the strict limit.

Binance Coin (BNB)

• Binance regularly burns BNB using a portion of exchange profits.

• This burn reduces total supply, increasing scarcity over time.

• The reduced supply supports BNB’s long-term value proposition.

Ethereum (ETH) (Post-EIP-1559, partially deflationary)

• While technically hybrid, Ethereum now burns a portion of transaction fees.

• This burn offsets new issuance, making ETH supply potentially deflationary during high network activity periods.

Deflationary Token: Pros and Cons

Pros for Deflationary Token

• Creates scarcity and supports price appreciation
  A limited or reducing supply makes tokens more scarce, which can support higher prices if demand grows.

• Appeals to long-term holders
  Investors who want stable or rising value are attracted to deflationary tokens due to their scarcity.

• Improves perception of value
  Capped or reducing supply gives tokens a store-of-value quality, especially in times of rising demand.

Cons for Deflationary Token

• Reduced liquidity
  Lower supply can make tokens harder to access, which may slow trading and usage.

• Risk of hoarding
  Users may hold onto tokens, waiting for price increases, which limits active circulation.

• May discourage spending
  If users expect token value to rise, they may avoid spending or using the token, reducing ecosystem activity.

Hybrid Token Models

What is a Hybrid Token Model?

The hybrid token model is a model that combines inflationary and deflationary token supply. It uses token issuance and burning to balance the supply. If there are new tokens, some amount of those tokens are created to reward user participation. Others will be burned in order to control supply and reduce inflationary pressures.

This method provides flexibility. It enables projects to maintain liquidity and activity while introducing scarcity when necessary. Because hybrid models can adapt to changing market conditions, founders have greater control over token economics.

What is The Example of Hybrid Token Model?

Ethereum (ETH) — Post-EIP-1559

• Ethereum still issues new tokens through validator rewards.

• At the same time, a portion of transaction fees are burned automatically.

• During high network activity, burned tokens may exceed issuance, making ETH temporarily deflationary.

Why choose hybrid token models?

• Balance liquidity and scarcity
  Hybrid models support daily use and active participation without losing long-term value.

• Flexible for changing market
  Projects can adjust token supply dynamics to respond to demand and market shifts.

• Appeals to both users and investors
  By rewarding activity and controlling supply, hybrid models cater to various user groups.

Choosing the Right Model for Your Project

There is no one-size-fits-all token model. Every project has different objectives and user habits. The token model that best suits the founders' ecosystem and long-term plan must be selected.

Each model functions best as follows:

Inflationary Token Models → Best for Active Participation

Inflationary token supply works well when you need to drive frequent activity. Games, social platforms, and utility protocols benefit from constant user engagement and liquidity. Issuing new tokens keeps the ecosystem active and ensures users and contributors are rewarded.

Best for:

• Gaming projects

• Social or community-driven platforms

• Utility tokens with daily use cases

Deflationary Token Models → Best for Store of Value and Scarcity

Deflationary token supply is ideal for projects that want to promote holding and value preservation. Capped or reducing supply supports scarcity, which can attract long-term investors and improve price stability.

Best for:

• Governance tokens

• Store of value assets

• Projects focused on long-term investor appeal

Hybrid Token Models → Best for Balanced and Flexible Ecosystems

Hybrid token models offer the most flexibility. They allow projects to incentivize participation while managing supply to avoid over-inflation. This approach suits general-purpose blockchains and platforms where both liquidity and value retention are important.

Best for:

• Layer 1 and Layer 2 blockchains

• DeFi platforms

• Ecosystems with diverse users and use cases

Founders should assess their project’s needs carefully. Consider user behavior, liquidity requirements, and long-term goals before choosing a model.

Build Smart Token Models with TokenMinds

Choosing the right token model is critical. It shapes how users interact with your project, how value flows, and how you scale over time.

At TokenMinds, we help Web3 founders design effective and sustainable token models. Whether you need an inflationary model to drive participation, a deflationary system to create scarcity, or a hybrid design to balance growth and value, our team is ready to support you.

We offer end-to-end tokenomics advisory and development, including:

• Token model strategy

• Supply and distribution design

• Token utility planning

• Smart contract development 

• Smart contract auditing

Launch your project with confidence.  Schedule a free consultation with us now.