From time to time someone wants to propose burning ADA coins in the Cardano ecosystem. Let’s explain why this is a foolish idea.
Cardano has capped the number of coins at 45,000,000,000 ADA. Burning coins would mean that the maximum number of coins would be reduced by a predetermined number. Usually, coins from circulation are burned. No one could ever use the coins again. If there is a constant demand for the coins, burning the coins could cause a shortage in the market. This could affect the growth in the value of ADA coins. The remaining coins would be more scarce. Burning coins is essentially short-term speculation that has no meaning in the long run.
Cryptocurrencies are still very volatile and one of the reasons is that adoption is low. As utility grows, the network effect will grow. From a certain level of adoption, coins are better able to maintain a stable value. Burning coins does not raise the utility of a project. The demand for coins must be influenced primarily by the long-term utility of the project. I don’t like to compare ADA coins to stocks, but in principle, the similarity is that there is high demand for the stocks of those companies whose services have a large network effect.
Burning coins would be an intervention in the predefined monetary policy of the Cardano network. It is not a good idea to change monetary policy for short-term speculation. Cryptocurrencies want to differentiate themselves from the traditional financial world in that the individual does not have the chance to change the rules as he needs to. Once the rules are set, they should apply forever. If fundamental protocol rules like monetary policy are to be changed, the majority of the community should agree.
If one coin burning occurred, it could be that someone else would demand another coin burning. This could significantly damage the reputation of the project as no one would know when the next burning would occur. People would hold ADA coins for speculative reasons only, and that is certainly not the goal of the project. ADA coins should be the key to decentralizing the project. While their market value is important, that should not be the only reason to hold the coins. Users can own Cardano through ADA coins, which is very important for the future.
Burning coins brings with it many questions. For example, who to ask to burn the coins, whom coins to burn, or how to carry out the burning technically.
It’s naive to ask Charles Choskinson to burn coins. Cardano is a decentralized network. Charles is the CEO of IOG, but he has no control over the Cardano network. Neither Charles nor the team has control over users’ ADA coins. All ADA holders have control over the network consensus. Each user has their ADA coins under their own control as long as they hold private keys.
Charles may own ADA coins. But it’s stupid to ask someone to voluntarily give up their own wealth. It’s like asking someone to burn their fiat currency for the benefit of other people. It may be a noticeable loss to the individual but it makes no noticeable difference to others.
In a decentralized network, a central authority cannot make decisions. Therefore, the request would have to go to the whole community and a vote would have to be taken. Everything else could be considered a central decision and this would be perceived negatively by the community.
What ADA coins to burn? I suppose no ADA stakeholder would voluntarily burn their own coins. Cardano has a project treasury. Would it be possible to burn these coins? The community owns these coins, right? The ADA coins in the treasury are used for ecosystem development. They are used to fund winning projects in Catalyst. It is not smart to burn coins that can be used for ecosystem development.
So the best thing to do would probably be to burn the applicant’s coins.
How can coins be burned? Burning can be done by transferring the desired amount of coins into inactive, unlocatable wallets, causing the coins to be purposefully lost. Unable to be accessed, these coins have essentially been destroyed forever, in other words, burned. There are other ways to burn coins forever.
Why actually destroy coins that have value and can be used for something useful? Burning coins always have only a short-term effect, mostly purely speculative. In the long run, it hasn’t done anything positive for any project. For most users, it just changed some numbers regarding monetary policy. The burning effect fades quickly in high volatility.
It is convenient to ask what brings value to the project. It is important for projects to develop and grow their adoption. It doesn’t help to destroy value, but to use value to build new value. Burning coins may make all the ADA holders happy, but they will do nothing for the network or for the community in return. Maybe they will sell the coins after the pump. It’s much smarter to use the coins as a reward for those who want to build something new. Catalyst is used to allow ADA holders to select projects to receive funding. ADA coins are used to build something of long-term value.
There is a saying that nothing good in the world is free. If so, it can be suspicious. There’s some truth to that. If any new value is to be created, someone has to work for it, and it’s okay for those people to get rewarded.
Blockchain networks will only make sense if they are adopted. Adoption won’t happen without technological innovation and meaningful services. Investments in ecosystem development and projects related to increasing adoption are specific places where it makes sense to use coins from the project treasury.
Successful projects can lead to higher adoption rates. Higher adoption can lead to an increase in the value of ADA coins. Increasing project utility will have a long-term effect on the value of ADA. In addition, the value of ADA coins in the project treasury will grow, so there will be more to further develop the ecosystem. The high volatility of cryptocurrencies is very uncomfortable and only stabilizes with higher adoption and utility. Burning coins has exactly the opposite effect and increases volatility.
Ethereum burns fees. This burning is part of monetary policy and is done gradually. Burning is part of the rules in the protocol. The idea is that if more ETH coins are burned than new coins are issued, Ethereum would have a deflationary monetary policy. The more fees are burned, the more deflationary Ethereum will be. ETH is sometimes referred to as ultrasound money.
This system is a bit strange, as the fees are something that should cover the costs of running and maintaining the network. Ethereum rewards nodes that produce blocks through the inflation of new ETH while burning the collected fees. The two principles seem to go against each other. Ethereum is thus trying to dampen the effect of endless inflation.
It has to be said that it can work economically, although the principle may be more difficult to understand. Ethereum’s monetary policy can be both inflationary and deflationary. The number of coins in the future can only be estimated with a small degree of accuracy.
Cardano is more understandable as it uses fees directly where they are needed. That is, to reward pool operators and delegators. Moreover, fees are used to fill the project treasury. The network collects the fees and disposes of them as needed. Collecting and using fees has no effect on monetary policy. It is a circular economy where users pay those who deserve to be rewarded. Stakeholders make decisions about ADA coins in the treasury.
The main advantage is that the fees fill the treasury, so if Cardano is successful, it will never run out of money for further development. This makes Cardano sustainable in the long term.
Having enough ADA coins in the treasury is a guarantee that it will be possible to finance solutions to problems that may arise in the future. In addition, Cardano is independent of VC funds. Developers will be paid directly from the project treasury and will only work on what the community agrees on. There is no risk of VC funds gaining control of the protocol. If fees were burned instead of fulfilling the treasury, a different system would have to be devised to ensure sustainable decentralization of the project at the decision-making level.
I hope I have convinced you that burning coins cannot bring anything good to the project, but rather harm it. ADA coins are a precious resource that should be used, not abused. If you want to help the Cardano project, you can propose your own project and try to get funding through Catalyst. Alternatively, you can vote on what project you think is best. Both will help more than demanding coin burning.
Read the article: No burning of ADA coins | Cardano Explorer