Hard Cap Meaning
What is the Meaning of Hard Cap?
A hard cap is the maximum number of tokens that can be produced in a given cryptocurrency. It is set in the code of a blockchain to keep the supply of tokens to a definite number. This capped supply prevents the minting of new tokens into circulation. This mechanism is designed to prevent inflation and shore up a cryptocurrency’s market price.
Bitcoin has its hard cap set to 21 million tokens, and the coins have to be mined over several years before the maximum supply is attained.
The hard cap is one of the features that differentiates cryptocurrencies from fiat and other precious minerals. The amount of Bitcoin that will ever be in circulation is certain, while the same cannot be said for the dollar or gold. It is a parameter in the cryptocurrency’s code and to modify it, the developers have to change this parameter. This will likely result in the creation of a new cryptocurrency. A bug could also change the hard cap of a cryptocurrency. This happened with Bitcoin’s inflation bug in 2010. The ‘integer overflow bug’ allowed an attacker to mint 184 billion Bitcoins temporarily before developers on the blockchain rectified the problem.
In the context of initial coin offerings (ICO), which new blockchains use as a funding strategy, the hard cap is used to set a limit on the maximum number of tokens that can be sold. Soft cap is the minimum amount of funds that can be raised during an ICO. Hard cap helps to maintain a token’s value while the soft cap ensures that the blockchain does not raise excessive funds that lead to financial instability.