How burning tokens can increase the return for stakers
There has always been a discussion whether burning tokens is a good idea to increase the price of a token or not. On the one hand the burning of the token reduces the supply and should therefore increase prices with a stable demand. Others say that burning doesn't bring much because what really helps a token evolve is an increase in demand.
I think that both views are not totally wrong and I couldn't really say one side is right and the other is wrong.
Why burning tribe tokens is positive for token holders
I wanted to look at it from another perspective. The tribe tokens on the second layer of Hive, have for most of them a similar supply evolution. New tokens are minted on a linear basis. For some tokens, there is a supply reduction built in, others don't have it.
Let's keep in mind that the minting is directly related to the stake of the users. The users with their stake, allocate the new minted tokens. There is a direct relationship here between stakers and supply.
What I wanted to figure out is the effect that burning has on stake holders. For that I took the example of the CTP tribe with which I'm very familiar.
Let's look at the basics of the CTP token:
Every day 3951 new CTP tokens are minted. 15% of these tokens are issued through the miners (CTPM) and 85% through curation and author rewards. In the CTP tribe, authors get 60% of the rewards and curators get 40% of it.
At the moment there is a total supply of 3'815'762 tokens that were minted. Of these tokens 107'000 were sent to @null which means that they were burnt. This gives us a circulating supply of 3'708'762 tokens.
To look at the effect that burning has on the token, I made the calculation of what would be the inflation rate without burning and with burning:
Without burning:
3951 x 365 / 3'815'762 = 37.79%
With burning:
3951 x 365 / (3'815'762 – 107'000) = 38.88%
This means that with the burning of 107'000 tokens (2.8% of the supply) that took place, the inflation rate of the token is actually increased by 1%. This means that the return for stake holders is also 1% higher! Of course there are also other factors that come into play, like the staking rate and voting rate, etc. But all other things being equal, people who curate with their stake will have a better return if tokens are burnt.
Without burning, the inflation rate of hive-engine tokens becomes smaller over time. If you stake a token then your return will diminish the more tokens are in circulation. This makes the tokens less interesting in a world where maximal APR is looked for. Burning tokens and reducing the circulating supply can help to keep the token more attractive and offer a higher return for people staking it.
In my opinion, burning tokens has therefore a double meaning. They reduce the supply on the market and at the same time, they make the token more interesting by giving more APR for stakers.
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Electronic-terrorism, voice to skull and neuro monitoring on Hive and Steem. You can ignore this, but your going to wish you didnt soon. This is happening whether you believe it or not. https://ecency.com/fyrstikken/@fairandbalanced/i-am-the-only-motherfucker-on-the-internet-pointing-to-a-direct-source-for-voice-to-skull-electronic-terrorism
Burning only really helps price. So while they are nice, I don't think it should be the primary focus for people because the tokens themselves still require a strong community and use case.
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I disagree somewhat. Burning produces scarcity, which is a decrease in the total number. That causes the price to go up, but burning also helps to limit supply.
If the price of the token goes UP, then that helps the perceived value of upvoting and commenting, since those are rewarded in tokens.
I imagine that people would be more likely to vote and write content if they knew they received 10 tokens of some type worth $1 USD due to curation than recieving those same 10 tokens and the worth is $0.10. While it's the price that drives the human behavior which leads to more tokens, we can't ignore it.
Price, utility and demand of a token are tightly linked together I believe. I saw how POB was attracting tons of people when it's price was very high.
By burning token, not only do we limit it's supply, we also increase it's attractiveness for staker and for buyers. People don't want to buy shit coins, they want to buy stuff that goes up in value.
Speaking of PoB, have you noticed that the volume of posts with the tag has fallen off now that the price is slightly lower?
It's amazing how people react to prices. When price of hive was 0.8 $ people were posting like crazy. Now number of posts decreased drastically.
That's one of the benefits of following the CTP tribe recommendations. Posting daily means you earn when others don't.
Put another way: You can't earn rewards on the post you never wrote. (shrug)
Totally agree lol
Well...I would say the human behavior changes with price. If people are the ones running to the ones with the most hype, then prices will just go back down after the hype changes.
I think we can kind of see how this worked with LEO token price being near $1 but it started to slowly decline after POB came out. I would say burning tends to just affect price and it might not affect the people who will stick around when its not the hottest thing.
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Yeah agreed. I dollar cost average my purchases, and buy and hold for the most part. I do sell some tokens when I earn a good number of them via miners. I stake 1/2 and sell the other 1/2. That way I grow my account while also creating some liquid hive I can use for whatever. I definitely appreciate our conversation here, because the movement of the prices on this market baffle me sometimes. :D
The thing that people tend to forget is that staking a token is in most cases the primary use case for this token. Some times it's even the only one. In this respect, burning can improve the quality of this use case.
Well yes the staking is also a feature and I guess it could increase yield. However I still think adding more utility besides that can only be better for the token's future. For example, I think CTP can be used to pay for subscription services so there is always some base value for CTP.
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I totally agree with you in this respect. The more use cases and ways that you can use a token, the better.
Yep. with fire pay and hive pay, there's plenty of ways to pay for misc services with hive and ctp. I wrote about this a while back (https://robwillmann.com/traffic-resources-leverage-fire-pay/) and there's a lot of traffic exchanges, mailers, and ad sites where you can pay straight up for upgrades with ctp.
Interesting information. Thanks for sharing. How do tokens get burned?
To burn tokens you simply send them to @null. It's as if you would send them to another user. When tokens are on @null they can't be moved anymore and they are withdrawn from the circulating supply. By checking the number of tokens @null owns, you can actually see how many tokens were burnt.
Thanks. That makes sense
Would you burn DEC? Or SPS?
I wouldn't. Why not? Because the explosive growth of Splinterlands makes up for the inflation and it even dwarfs it (that's one of the reasons why DEC price is out of peg even if inflation grew as DEC moved away from its loose peg).
So in my opinion burning only makes sense as a substitute for the lack of exploding growth, to tame the downward pressure inflation has on price.
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Splinterlands is a good example here but I believe that it's quite exceptional to see such a growth in members. On the other hand there are mechanismes in place that increase supply when prices go up and reduce supply when prices go down. Tokens like DEC are far from being minted at a random pace. There are also mechanismes in place that actually burn DEC and SPS I believe (sales of DICE packs, tournament fees).
I think that burning, if kept dynamic can be a good mechanisme to actually react to demand increases or decreases. In my opinion, a tribe should work on both sides of the scale. It should work on increasing demand and also do something to reduce supply.
Yup, DEC has both dynamic inflation and burning, but as you can see they are both ineffective mechanisms during exploding growth. When demand really soars inflation can go high without any consequences, except good ones, because it allows smoother and quicker growth. In Splinterlands case, I believe the higher inflation 'doesn't work' because there were no packs to buy and the cards on the secondary market are limited compared to the growth level.
The same is true if there isn't enough liquidity and a slow mechanism to release more liquidity (Hive), while expecting serious growth. That's why I don't believe in the burns of Hive.
Not a good combination is if a token has a high liquidity, high inflation and slow or inexistent growth. Then burning is a way to prevent the token depreciation, until ways to stimulate growth are found.
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You sum it up very well. I think it is also important how much a token is distributed. If you look at hive, it is distributed among thousands of accounts which is positive. Some tribe tokens are spread much thinner. The smaller the distribution and the more inflation, the more it makes sense to burn some tokens I believe. The best is to do the same than Splinterlands.. Exponential growth. In this case burning is definitely not necessary lol