1/ Following the recent conversation I saw with @cardano_whale and @TheCryptoviser regarding whether token burning makes sense, I've decided to wear my economist hat and take a stab at it.
[A THREAD ON TOKEN BURNING]
2/ WHY TOKEN BURN AT ALL?
The argument goes that token burning is good for current holders as it reduces the overall supply of the asset in circulation, which assuming everything else remains equal, pushes the price up due to the law of supply and demand.
3/HOW DOES IT WORK IN ECON TERMS
Token burning is deflation, as you're reducing the overall number of a currency in circulation and thereby raising the price.
The problem though is that this stops activity (if you think a $1000 TV will be worth $900 tomorrow, you'll wait)
4/WHY BURNING IS BAD FOR #CRYPTO
#Blockchains primarily derive value from the amount of people using a network, or how much people think they will use the network in the future.
If people are actively disincentivised from using a network, and nothing materializes, hype dies
5/EXAMPLE
You have two equal coins, except one has burning (hence likely higher fees) and the other one doesn't
You have equal amounts of each. Which ones are you likelier to use first? The burn free one, of course.
Which ones are developers likelier to build on? The used one!
6/EXPLANATION
This is called Gresham's Law - where "bad money drives out good"
If you have a gold coin and a copper coin of equal value, you'll use the copper one first, as you expect gold to appreciate more.
But if the value of gold were tied to its use, then you're screwed
7/ WHERE BURNING MAKES SENSE
Fixed Assets that compete against each other but don't derive value from network effects. For example, if you burnt real estate, assuming that it's not close enough to drive your property value down, the reduction in supply would help your property.
8/CONCLUSION
Burning is a method that protocol owners use to drive up the price of their token at the cost of long term usability, thereby development and eventually even potential adoption.
While it seems like a good idea, deflation will have the exact opposite effect.
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