With freedom comes responsibility. Following the Chang hard fork, the community gained control of the Cardano treasury. There are proposals to burn the ADA in the treasury, but this would be a grave mistake. Instead of burning, we should invest ADA wisely in the ecosystem to create new value. It’s crucial to invest in building a strong network effect. We must not burn a single ADA.
Burning ADA Is A Really Bad Idea
Some have suggested burning ADA coins from the Treasury, but that would be a terrible mistake. This would remove ADA from the total supply. ADA wouldn’t be sold. They would never enter circulation. Technically, it would mean making these coins impossible to spend.
Approximately 3.3% of the total ADA supply is in the treasury. Burning a small amount of these coins might have a short-term impact on ADA’s price, but the long-term effect would be negligible. It would be similar if all the coins in the treasury were burned.
In the short term, this could lead to speculation. During the ICO mania, some projects burned tokens to inflate their market price, which often resulted in a steep drop in value afterward. None of those projects are relevant today. I would argue that such an announcement would have minimal impact on market behavior at this point.
And what about the long-term impact? In general, scarcity can increase the market value of an asset. However, demand is always essential. Demand for cryptocurrency grows with utility. Cardano must be useful to people. We have to build a strong network effect. This will support the demand for ADA.
Digital scarcity alone doesn’t necessarily drive demand. However, when combined with utility or other factors that create demand, it can significantly increase the market value of ADA in the long run.
Another factor driving demand can be the narrative. Digital scarcity works well for Bitcoin, where people don’t necessarily need utilities or a direct network effect. The store of value narrative is sufficient for them. However, this won’t work the same way for Cardano. For Cardano to succeed, it needs to be one of the dominant smart contract platforms. Therefore, our ecosystem must focus on utilities.
We need investments to build a strong network effect, and ADA in the treasury can be utilized for this purpose.
How to use ADA in treasury better?
Consider what we could achieve with 1.5 billion ADA.
We could launch several more Catalyst Funds, use ADA for liquidity in DeFi, accelerate the development of scalability technologies, fund the deployment of USDC and USDT on Cardano, and even invest in marketing.
The Cardano ecosystem needs to address several issues, including low liquidity in the DeFi ecosystem, low scalability, and the absence of major stablecoins.
It’s important to note that many newer projects tackle these challenges by retaining a large amount of coins and investing them strategically. They pay developers, inject funds into DeFi, pay Circle and Tether to deploy stablecoins on their blockchain, invest heavily in marketing, and even pay influencers. They are willing to give a big chunk of coins to VC funds. They then speak well of the project, because they pump their bags.
Another effect is that VC funds are willing to invest in building applications within the ecosystem in which they have already invested by coins. This approach supports the growth of their investment. They bought the coins cheaply from the team and want to sell them later when the ecosystem matures.
Logically, the willingness to invest in the growth of the Cardano ecosystem is less attractive for VC funds. They didn’t get a chance to buy ADA cheaply.
The three founding entities of Cardano decided not to use Treasury funds for these purposes, leaving such decisions to the community. VC funds were deliberately left out of the initial distribution of ADA coins.
There are countless ways to spend ADA to ensure Cardano’s success. The worst thing we could do is destroy the very resource that can finance these initiatives.
ADA is a scarce resource, with a maximum supply of 45 billion coins. Like Bitcoin, Cardano does not have infinite coin inflation. Cardano doesn’t need coin burning. Ideally, a circular economy should develop. Burned ADA will never re-enter circulation.
For projects with infinite inflation, like Ethereum, burning part of the fees makes sense. Projects might burn all collected fees. However, Cardano has no inflation, so there’s no need to burn coins.
Even if we consider burning fees, It would not be smart, as fees are a source of income for the treasury and provide staking rewards including SPOs rewards. Are we certain that stakers would be satisfied with lower staking rewards? And how would the Stake Pool Operators (SPOs), who need to cover the costs of running the pools, react? Let’s not forget the income to the treasury.
We can consider that reducing supply, thereby increasing scarcity, might positively impact ADA’s market value. However, this discussion should take place once Cardano has established a strong network effect. Since this isn’t the current reality, these debates are premature and not meaningful at the moment.
Apart from fees, the primary source of income for the treasury is the ADA in the reserve, which totals approximately 7.8 billion ADA. Of this amount, around 20%—or about 1.56 billion ADA—will be gradually transferred to the treasury.
If we burned 1.5 billion ADA now, it would take many years to accumulate the same amount in the treasury again. In the meantime, we would have limited funds to invest. Treasury income is projected to be around 300 million ADA in 2025. However, this income is expected to decrease in the subsequent years.
ADA in the treasury represents a financial value that can be transformed into other values beneficial to the ecosystem. We should view it as an opportunity to invest wisely in the ecosystem, ensuring some ADA is returned or that the value gained significantly contributes to our success.
At the moment, it makes no sense to consider giving away ADA from the Treasury or selling it cheaply to VC funds. The Treasury should function as our own VC fund. Cardano must be a self-sustained ecosystem, ideally independent of external capital, and should not allow VC funds to offload their holdings onto ADA holders.
In light of the rapid success of competing chains, this may be a more challenging path, but it is the path we have chosen.
ADA serves as a resource for decentralization. It is essential not only for block production but also for on-chain governance, where it is used to vote on the project’s future. It makes no sense for VC funds to hold major decision-making power. In this context, Cardano’s initial coin distribution has been beneficial for the community.
We must never burn even a single ADA from the treasury. Let’s view ADA as a scarce resource that we can strategically utilize to foster the growth of the ecosystem.
Conclusion
I’m sure CC members would never approve of burning the ADA in the treasury. It would be against the principle of sustainability or maybe some other principle. Perhaps we should include an explicit ban on burning treasury coins in the Cardano constitution.