Your favourite micro-cap project is at a $4.8m mcap. You know at $5.0m there’s going to be a $20k burn. $20k worth of tokens to the ether. You shill the shit out of the burn schedule all over Telegram, Twitter and Reddit. There’s fucking burn gifs everywhere. Arnold’s getting incinerated. Burning house girl is doing the rounds. Stranger things flamethrowers are everywhere. There is hype, there is FOMO. For once in your life, you feel part of something.
The $5.0m mcap hits. The devs announce $20k of tokens have been sent to Valhalla. You look at your investment, not much has changed, but it doesn’t matter — there will be an even bigger burn at $10m. Let the shilling begin.
If this story sounds familiar, it should. Burns are a commonly used tactic to drive short-term hype, but in a lot of ways, that’s all they are good for. Let’s explore why.
Simply put, burning is the process of removing tokens from supply. This means that the tokens you own are now rarer. When you burn tokens, the marketcap remains the same, but there are fewer tokens in circulation, so you own proportionately more of the total pool. Let’s take an example.
Imagine token $PONZI has a mcap of $1000. There are 1000 tokens in circulation, each of value $1.00 (mcap = total available supply x token price)
You hold 10 tokens. That’s 1% of the total supply, each token is worth $1.
Let’s imagine $PONZI decided to do a 10% burn, reducing the supply from 1000 tokens to 900. The total amount of cash contributed to the pool is the same, so the marketcap stays at $1000.
But you now own 1.11% of the total supply (your 10 tokens / 900 available). The real amount of tokens you hold hasn’t gone up, instead, the cost per token has increased, from $1.00 to $1.11.
This is how a burn works.
One important consideration to make with this article is that I am speaking about tokens with fixed supply utilising burns. This is a league away from inflationary protocols such as Ethereum implementing EIP-1559 to make it deflationary.
“In a fixed supply, there is no danger of tokens decreasing in value due to inflation, a bullish signal for investors. Whereas with inflationary mechanisms, there is always the concern that tokens will be issued at such a rate that it will cause a drop in value to existing holders.”
The reason the distinction is important to make is because in a fixed supply, there is no danger of tokens decreasing in value due to inflation, a bullish signal for investors. Whereas with inflationary mechanisms, there is always the concern that tokens will be issued at such a rate that it will cause a drop in value to existing holders.
When a fixed supply token issues a burn, what they are effectively saying is. ‘I think burning this amount of tokens is the best way that I can add value to my community.’ I think this is completely the wrong stance to take, here’s why.
When you burn tokens, you are burning real cash. Cash that could be used to further the development of your project. Let’s take a look at what this could means, using Lithium as the case study.
A $20k burn could instead be used to:
We are firm believers that we back ourselves to be more ingenious and find better ways to add value to our investors, and our platform, than just burning tokens.
Burn events can also attract the wrong kind of investors, those with short-term mindsets who just want to see a quick pump in their tokens, rather than be involved in the long-term journey of the project.
We think burning should be used very sparingly. For certain projects, that are still in the speculative, pre-proof-of-concept phase, burns may have their place. If you can accompany a burn with a well thought out marketing campaign, to drive real adoption of your token, then maybe a burn is an acceptable way to spend tokens.
For most projects though, and especially ones that have a working product, we think burns are a bad use of funds. They’re a short-term tactic in what should be a long-term game. There are far superior ways for teams to spend their cash, and emphasis should be placed on these avenues.
As for Lithium itself, we will practice what we preach, and no longer be burning tokens, we just think there are far better ways to add value.
