In many ecosystems of the natural world, seasonal wildfires actually preserve a delicate balance of biomass and promote biodiversity. Attuned to this insight, Indigenous populations then started setting “prescribed fires” to maintain healthy ecosystems. Fast-forward to now, in a different type of field — economics — and the practice of intentionally burning excesses still proves important for maintaining stable and financially viable ecosystems. Enter token burning.
The dynamo of supply and demand is the fundamental underpinning of economics. As such, supply and demand play an essential role in crypto, and DAOs typically burn tokens as part of a broader economic strategy. In the cryptocurrency space, token burning refers to the intentional removal (or burning) of a set number of tokens from circulation, making them permanently unavailable. To do so, these tokens are often sent to a “burn address” — a digital campfire to permanently vanish into ash and stardust.
AxonDAO Announces a Token Buyback and Burn
To help keep their ecosystem clear of debris, AxonDAO plans to buy back 5.44 million AXGT tokens, which, as of this writing, equates to a roughly $1.75 million buy. These are tokens in the circulating supply, so the community will definitely feel the buyback and burn’s effects on their wallet (in a good way). And, pulling from the above analogies, prescribed fires aren’t beneficial unless lit on fertile and usable land, meaning this circulating supply is set to burn off from a locked liquidity pool. This means AxonDAO can’t just create another 5.44 million AXGT tokens to replace the burnt tokens, subverting the laws of supply and demand.
Burning supply will inevitably push demand, and to keep a healthy amount of pressure on the demand side, AxonDAO will also begin burning half of its 1% buy and sell fees in AXGT. You can think of this as an ongoing pilot flame to keep the “demand fire” stoked. While economic mechanisms have been applied before to support token stability, AxonDAO is now also placing pressure on the demand side by continuously burning earned AXGT.
Overall, the purpose of AXGT — as a utility token — is for it to be traded, as the trades earn funds for worthy DeSci projects. Or, to put it another way, burning earned AXGT (fertile ground) creates a healthier ecosystem for both community members and project fund recipients.
The Six Benefits of Token Burns
For token holders, a scheduled burn can be cool (red hot) news, but AxonDAO definitely isn’t the only player in the crypto space to utilize this economic mechanism. It’s a widely accepted practice, with real upside for charts and otherwise. Let’s light a match to explore the six benefits of token burning and how it impacts cryptocurrency ecosystems.
1. Reduces Supply, Increases Scarcity
The most immediate effect of token burning is the reduction in the total supply of a particular token. With fewer tokens available, the overall scarcity of the asset increases. This can lead to a rise in the value of the remaining tokens, assuming demand stays constant or, in a better and greener world, increases.
In basic economics, the law of supply and demand dictates that when the supply of an asset decreases, as long as demand remains the same or grows, the price of that asset increases. In the crypto world, where market sentiment and speculation can be particularly volatile, token burns still operate much the same.
2. Increases Token Value and Price Appreciation
By reducing the amount of circulating tokens, token burning can create upward pressure on the price. The decrease in supply — assuming demand stays the same or rises — typically drives the price of the remaining tokens up. And, before you think of this as manipulative, how do think buybacks work on Wall Street? When a company repurchases its own shares, it reduces the overall number of shares outstanding, which can lead to an increase in earnings per share (EPS), often resulting in stock price appreciation.
In the case of crypto, token burning helps establish a sense of scarcity, much like limited-edition collectibles. (Again, crypto isn’t the only place these economic levers are pulled). If a token becomes rarer over time, most token-holders will also be less likely to sell, contributing to price stability and growth.
3. Creates a Deflationary Economic Model
Token burning is commonly employed in deflationary tokenomics models. By decreasing the total supply of tokens, projects can protect themselves against inflationary pressures on their token. To be it another way, deflationary measures are the opposite of mining or staking rewards, which are both inflationary tactics and will increase supply over time.
For investors seeking to preserve the purchasing power of their holdings over the long term, a deflationary model is the cat’s pajamas. The idea is that, as the circulating supply of a token decreases, the token’s value — due to the compounded pressure of demand and scarcity — should appreciate. While fiat currencies tend to lose value due to inflation (or, you know, printing money), a currency following a deflationary model should gain value over time. A deflationary model may not always be practical in all real-world applications. But, for investors? Sure.
4. Improves Ecosystem Operations
As we’ve stated, burning tokens can create a healthier ecosystem for cryptocurrency projects. Sure, a burn may quickly raise the token value for holders, but the practice can also positively impact other aspects of the ecosystem in more subtle — but important — ways, especially for projects with utility tokens.
- Promotes Community Engagement
In some cases, token burning can also serve as a tool for decentralized governance, especially within decentralized autonomous organizations (DAOs). Community members may be allowed to vote on the frequency, size, or timing of token burns, encouraging engagement and involving token-holders in the project’s future.
For example, some platforms allow users to vote on whether certain amounts of tokens should be burned, providing an opportunity for the community to influence the project’s monetary policy. This approach aligns the interests of the community with the project, enhancing transparency and trust.
- Enhances the Token’s Utility
In some blockchain ecosystems, a portion of tokens may be burned as a result of transaction fees, as in the case of AxonDAO’s proposed burn of half of 1% of its transaction fees in AXGT. Or, when Ethereum transitioned to a proof-of-stake (PoS) model through the Ethereum 2.0 upgrade, it introduced the concept of EIP-1559, which burns a portion of transaction fees on every Ethereum transaction. This aided in reducing inflationary pressure, helping to ensure that there was always a balance between the network’s demand and its token supply of ETH.
Also, by linking token burning to network activity, projects can enhance the utility of the token. In other words, in regards to AxonDAO, the utility of earned AXGT through selling and buying the token helps to fund research projects and other initiatives.
5. Increases Trust and Transparency
When a project commits to token burning, it signals that the team is serious about the long-term health of a project’s ecosystem. They’re willing to take steps to reduce the token’s inflationary pressures, helping to build trust by demonstrating a commitment to sustainable growth.
Transparent token burns — where the tokens are verifiably sent to an immutable burn address — can be seen as an act of good faith. A transparent burn assures token-holders that the team is not sneakily manipulating the market or planning to inflate the total supply later with new tokens. This transparency can foster a more loyal community and attract institutional interest.
6. Token Burning Improves Tokenomics
Token burning plays a key role in refining the economic structure of cryptocurrency tokens. By periodically removing tokens from the overall supply in circulation, the team can control inflation and adjust the monetary policy of the ecosystem. The overall goal is to maintain a healthy balance between supply and demand.
For instance, burning tokens in response to hitting certain milestones can be a way to tie the token’s value to the real-world utility of the network. This process helps create a more dynamic and responsive tokenomics model with a stronger, more sustainable economic foundation.
Similar to seasonal wildfires in the natural world or prescribed burns in agriculture, token burning is a valuable mechanism in cryptocurrency. The burn function can increase scarcity, boost token value, and incentivize long-term holders, resulting in a healthier and more resilient ecosystem. Overall, it’s a reason for investors to feel fired up.
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