ADSactly Crypto: What Is Coin Burning?
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
Old concept but new implementation
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.
Why the need to burn tokens
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:
- Reduce supply
- Getting rid of unsold tokens in an ICO
- As a network transaction cost
- Proof of burn consensus
- Reduce spam transactions
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).
You can try burning STEEM
Did you know you can burn STEEM?
- You can either set your beneficiary to @null when creating a post and all the rewards will be burned.
- You could transfer STEEM to @null for it to be burned
- Or you can use promotional tools on steempeak which will burn tokens but promote your post to a broader audience.
Burning is not an absolute science
Of 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.
Feel the burn
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.
Written by @chekohler
Sources
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I am completely unaware of these financial complications and even more so if they are digital. I understand that the figure of the "burning of currencies" (which at times in history has been literal), seeks to influence inflation. But I find it a bit difficult to apply it to the blockchain, and particularly to Steem. Is there a bulky or "unreal" issue of Steem? Is that the cause of the diminished value it has at present? I'd appreciate your clarification. Thank you for your always interesting and current post, @chekholer.
Well the burning function needs to be coded into the blockchain on the protocal level so like Bitcoin doesn't have it but STEEM does, but steem will never have a fixed supply of tokens. The reason for the burning is because there aren't enough users competing, wanting, using, buying and selling steem and each day new steem comes on to the market it means more coins chasing fewer users, goods, services etc. In theory the more currency produced and the production remains the same the weaker the purchasing power.
If we are to improve the purchasing power we'd need more users, more use cases and more ways to remove steem from circulation such as burning it for certain types of transactions or promotions for attention to your content or advertising
How do you control the flow of digital coins? I thought it was impossible! Also what I see as impossible is to control the quantity and value with this mechanism. Who can guarantee me that scarcity will bring a high price? Is there no possibility that it will tend to go down as it is not circulating? I read about the burns once in connection with the BTC. I think there's a lot of risk. Thank you for this very pertinent information
You can't really control the flow of coins it will always go to those who want it most by effort/mining/purchasing. No one can guarantee me that scarcity will increase the price, its more of a long term play in hope that you reach a point where the amount in circulation is getting the most value it can, obviously, you can't burn your way to a specific price. Burning is to remove dead currency not generating production the only way to really improve the value is to have more people wanting to use it in combination with a reduction in inflation.
One could do the math, but at current inflation rates, you'd have to burn a considerable amount before reaching an amount that had impact on the price. That's a pretty obvious one to see. But real control requires a complicated centralized system of retracting the supply of steem and re-releasing it if it ever needed it.
Did someone look into the difficulty of changing the inflation rate on a code level already? I'm not sure what the opposition is (other than the fact that rewards are based on inflation).
We all agree that there's not enough activity to justify the inflation rate right now and it would be great if there was a repository where the tokens could be stored and released by some type of oracle. That might be a solution if everyone could trust the oracle.
There has been talk of reducing the inflation rate I saw an SPS proposal for it but I don’t think the community really gravitated to it since it’s a stop gap solution that may not have the desired effect and because it would require a hard fork
Burning or reducing inflation also takes a while to see effects I think if it was a natural part of the user experience like part of
Quick power down
Promoting your posts
Buying ad space
Securing a smart contract
Selling directly to fiat
It could all help
I like your idea of having the inflation sort of pegged to the demand/user base and released as we hit certain amount of daily active users that could give the reward pool a lot more flexibility and be agile to what’s happening on chain and encourage user growth
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