Cryptocurrency: Why Do We Like To Burn Money?

Everyone loves a good token burn. After all, this can only enhance the value of one's holdings, right?

It is simple mathematics: less tokens out there means the supply is reduced, creating more of an impact on price with the same demand.

This is akin to stock buybacks which the equities' market always loves. So why shouldn't it apply to cryptocurrency?

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Therein lies part of the problem. People are conditioned to look at this exactly like they do stock. It is a vehicle for speculation. Thus, the currency element is removed in that incentivization is off the table. Instead, mooning is all people care about.

From this perspective, we can see a major mistake being made. It is, at least in part, why many projects are stalling out.

Certainly, there are many situations where a burn is required. Perhaps the allocation of tokens to start was completely misguided. Some figured having trillions of tokens was a good way to approach things. Perhaps that does require some adjustment.

However, the crypto world is wrought with projects where major progress is monkeying with the token distribution. This is the extent of the development. Just change the inflation rate and we will see things moon. As if that is a magical pill that fixes everything.

Quite frankly, most people in crypto have their heads up their proverbial hind end. They really do not understand the discussion a great deal to begin with when it comes to economics and then compound it by pushing out all kinds of sensible ideas that are basics in business. Hence, since it is crypto, alter the distribution and that fixes everything.

It does not take a genius to figure out why so many projects are flailing. Instead of burning tokens, they should be looking at applying some basic business building principles. That starts with finding a need and filling it. From there, it is developing a product that offers the features that people will utilize. Then we need to add in a bit of marketing to get people using the product. Of course, we should work on branding.

All of this requires, of course, money. Projects need the resources to accomplish these tasks.

"Oh wait, we just burned a chunk of it. But hey, at least our inflation rate mirrors that of Bitcoin."

Does anyone think a country's inflation rate is a problem if the NGDP is double or triple that? For those who understand what that means, the answer is "of course not".

The key is something called growth. An inflation rate of 25% is nothing if the growth rate is 125% annually. The growth will more than eat up that inflation rate. In fact, in that situation, with those numbers, you are likely to encounter a liquidity problem.

"But with a 25% inflation rate, nobody will buy the token."

Let us look at Ethereum, which crossed the $4,000 level. This token distributes 21 million ETH per year. With a present supply of just shy of 116 million (according to Coingecko), that gives us an inflation rate of 18%.

Yet people are still buying it. How can that be?

Some might say the shift to PoS from PoW is the reason. That might be true but that factor was known long before this run took off. Perhaps, the following two charts has something to do with it.

This is from Etherscan denoting the wallet addresses from a year and now:

2020:

2021:

That is a wallet growth rate of almost 55% in a year. When you have 55% growth, an inflation rate of 18% is not a problem.

Here we see what happens when building takes place. Ethereum might have some problems but development and growth in activity is not on the list. Here that ecosystem is excelling.

Tokens also can serve other purposes as opposed to being something to speculate upon.

Money is a tool of collaboration. It is also something that can be used to incentivize people. Thus, individuals can be paid for engaging in certain activities.

Tokens are a form of marketing. By their essence, the distribution of them helps to raise awareness of a project. Yet, instead of offering them out to aid in growth, we burn them since, after all, only speculation matters. We want our token to moon and it has to happen now.

We see a lot of token burning taking place and yet projects still are mired in the abyss. Why is that if burns are the magic elixer that solves all problems? The answer is clear: token burns without growth means nothing. In the end, the result is a fantastic token distribution tied to a project nobody uses.

In network economics, we learn that value is derived by the Network Effect. This is situation that operates on an exponential scale. Whether we look at Reed's or Metcalfe's Law, the result is similar. The value of networks grows exponentially as each new user is added. This means 1 new user adds more than that value to the network. The exact ratio is subject to great debate. What is not up for dispute is the fact that linear growth is no part of the equation.

Token burns can be used as part of the growth strategy. We see this in the DeFi world right now. Here, projects offer an insane inflation rate to attract users. Through the staking/liquidity pool process, those individuals are rewarded with tokens.

Of course, the rate is a "teaser" meant to attract money to help grow the project. It is a situation that is intentionally set high with a burn to reduce to the distribution to a more accommodating level. The key here is that it is planned. Token burning is part of the strategy to make the project more attractive.

One of the most revolutionary aspects to the @spknetwork is the introduction of the Service Infrastructure Pools (SIP). Instead of burning tokens, this project is locking them up in, what it hopes is, a perpetually growing liquidity pool. By having the tokens still in existence, they are utilized to generate a return. This return can be applied as incentive for a variety of different activities that the network requires. This is achieving the same result as a token burn in the removal from circulation yet it is still generating more money.