Is Token Burn Bad?
One of the most important factors of token metrics is the founding team's strategy for dealing with unsold tokens. Presently, there are a few strategies teams take:
- Unsold tokens are burned
- Unsold tokens are held by the platform
- Unsold tokens are distributed among token sale participants
I'm going to use a case on CoinMetro to explain how each strategy works out.
CoinMetro is an upcoming exchange that bridges the gap between the ease of trading traditional assets and the ease of trading crypto. It is designed to improve the UX of crypto trading by offering fiat-crypto pairs, a large menu of tokens and coins, diversification tools, and managed portfolio services, all in one platform (more details).
Even though CoinMetro achieved its soft cap long time ago, it's expected to finish its token sale with a large portion of its circulating supply being burned, as it has a pretty high hard cap.
What should CoinMetro, or other projects, do with unsold tokens?
Tokens Held by the Platform
I am staunchly against this practice. The main thing that token investors need to keep in mind is that while project founders are usually given a small portion of tokens, they own the platform. Their main goal should be to focus on developing the platform further rather than token price. Even the small number of tokens retained by them, in my view, is too much.
Project founders are giving up no equity in their product when they offer token sales. Tokens offer a double-interest: should they prioritize the long-term success of the underlying product or aim for short-term pumps in token value. Clearly, the team should be given no opportunity to even consider the latter.
So, why am I so against tokens being held by the platform? At the end of the day, the platform is owned by its equity holders. So, if the team has even more tokens, there’s an issue:
The fact that no money was paid for tokens that are now entering circulation devalues the holding of all investors. Who's the winner? The founders, as now, their equity in the platform gives them access to a massive fund of tokens as-well (as the platform now holds an extensive amount of tokens).
In the case of CoinMetro, which is an exchange, tokens held by the platform would greatly boost platform liquidity. But even then, the practice would put the token investors at a disadvantage as, even with the morality issues of founders getting free cake aside, increased supply that is not backed by invested cash devalues the tokens that were actually bought by investors. So, I think CoinMetro has made the right and moral decision by not allocating unsold tokens to the platform.
Distribution Among Token Sale Participants
Distributing to token sale participants seems like a good solution: everyone gets to share the tokens among themselves. The issue with this is that distribution is done with a weighed average accounting for each contributor’s investment against the entire invested amount.
Keep in mind that the token valuation is based on the tokens available in main sale selling at their main sale price. However, an even distribution leads to private sale and pre-sale investors getting their share of tokens too. That leads to a portion of the tokens that were initially valued at main sale price being devalued.
Distribution among token sale participants offers a major issue: early investors benefit disproportionately more than main sale investors.
Some projects, like CoinMetro, which have tiered pricing throughout the phases of the token sale, would end up offering a very unfair distribution. So, I’m glad that CoinMetro’s team isn’t utilizing this strategy either.
Token Burn
CoinMetro is opting for a token burn of all unsold tokens. This is in the best interest of the token investors, but the downside to this approach, which CoinMetro is facing presently, is that the community grows greedy and aims to avoid spreading awareness of the product to ensure plenty of tokens are burned).
The fact remains that token burn is the most effective way of providing an even benefit to all token holders. This is one of the reasons most developers utilize token burn as they do indeed put the best interest of their investors first. Even though they weigh in the potential that the greed might restrain their community from spreading awareness of the product.
In conclusion, token burn is not bad; it’s in fact the best means of dealing with unsold tokens as it does not benefit the founder at the expense of investors and it also does not benefit certain investors more. Token sale is a blind benefit to the entire contributing community of a project. Given this, developers should utilize token burn for unsold tokens, but it is also the community’s part to not abuse the efforts of developers who are placing investors interest first.
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For future viewers: price of bitcoin at the moment of posting is 8520.10USD
Token burn seems to be the best solution for investors.
I and many others have a question that apparently hasn’t been answered, going beyond ICOs.
If the crypto market starts going up substantially, a large number of Tether will be traded for other cryptos. That will leave excess Tether that has to go somewhere in order to maintain parity?
Do you think they will be burned or that will be the end of Tether?
I think Tether is crucial for the exchanges to sustain money within the crypto market. It's unlikely they will burn it, and instead, they will themselves use it as a reserve.
There's 2 things that can happen when the market enters a bear trend:
Traders and investors exit the market completely. They sell crypto for fiat, and this may lead to some loss of capital in this market permanently. Exchanges do not want that to happen since they have nothing to do with the way this market runs; they simply need volume to profit.
Traders sell their crypto for Tether, and when they feel the market is improving, they buy back in to crypto they like. Remember, trading in and out of Tether only benefits the exchanges. Tether is a great way for exchanges to make money so they are going to utilize capital reserves to sustain Tether.
To the question in your title, my Magic 8-Ball says:
Hi! I'm a bot, and this answer was posted automatically. Check this post out for more information.
Token burn is best for the investors, at least in my opinion...
Informative article! Upvoted :)!
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STOPHey i also upvoted u.. We can help ech other..
Indeed of this post in current time, its sound and seem good token burn solutions for real time investor @hatu i think so far...