Deflation in cryptocurrency occurs when the total or circulating supply of tokens decreases over time. This is the opposite of inflation and is typically achieved through token burn mechanisms where tokens are permanently removed from circulation.
Deflationary tokenomics create scarcity by reducing supply. If demand remains constant or grows while supply shrinks, the remaining tokens become more valuable. Ethereum's EIP-1559 burn mechanism, for example, can make ETH deflationary during periods of high network usage.
True deflation requires that the rate of token burning exceeds the rate of new token creation. Many projects implement burn mechanisms (transaction fee burns, buyback-and-burn) alongside their emission schedules to achieve a net deflationary or balanced supply model.