If you've been using steem for the last few months and managed to click on the trending page, you may have noticed two posts. Burn post and SBD Potato two initiatives are looking to curb the creation of Steem by burning tokens and reducing its inflation over time. While it seems to be a contentious subject between Steemians I won't go into the specifics of that but rather what is token burning and why it is being used.
Coin burning is by no means unique to STEEM, and other coins also have burn functionality to try and reduce the number of coins in circulation.
Image source: - forbes.com
Burning is just cryptocurrency version of removing tokens from circulation. For years fiat currencies central banks would remove notes and coins from circulation for various reasons. In stocks, companies that are publically traded can buy back their shares, leaving the market with less available to trade.
Burning relies on the age-old principle of supply and demand.
When a certain amount of currency is chasing fewer goods and services the price of the goods will go up, but when a reduced amount of money chases the same amount of products and services the prices of those goods and services go down, and the purchasing power of the currency goes up.
There are multiple reasons why a company would choose to burn tokens, and all of them have value for token holders. The most common cause is to boost the value of each token by reducing existing supply.
Projects tend to burn for the following reasons:
In theory, fewer coins available for sale and on exchanges means that each token will be more valuable. Indeed, this is why most cryptocurrencies have a finite amount either in circulation or in future supply (such as Bitcoin's ultimate limit of 21 Million coins).
Did you know you can burn STEEM?
@null when creating a post and all the rewards will be burned.@null for it to be burnedOf course, there are huge risks associated with coin burning, too, its's not a simple calculation. First, burning coins has no guarantee that the remaining coins in circulation will gain in value.
It does not necessarily even reduce the total number of tokens outstanding in circulation, as the supply of tokens in circulation seems to fluctuate considerably on the open market. It only reduces coins form a particular source with he hopes that fewer coins flooding the market will assist the price.
So now that you understand the effect of burning tokens and why some projects feel the need, what do you think of the functionality? Is it essential, or does it paper over the cracks? Can you burn your project to success, or is it only a stop-gap or mild price stability?
Let me know in the comments below.
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