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Ask CryptoVantage: Why Do Crypto Developers “Burn” Their Own Supply?
The team behind PancakeSwap (CAKE) recently completed another one of their regularly scheduled CAKE burns.
Each week, the developers take a portion of the fees, lottery ticket costs, profile creation, and other products in the stack and buy CAKE off the market, immediately sending this CAKE to a burn address, effectively taking it out of circulation and reducing the supply.
PancakeSwap is not alone in performing this kind of task, but why do developers choose to burn their supply? That’s what we will answer in this edition of Ask CryptoVantage.
Deflationary Measure
One of the biggest advantages that most people give to cryptocurrency over fiat currencies is that they are generally a fixed supply resource, meaning that as demand goes up the price will increase because the supply is finite and cannot be changed. This is one of Bitcoin’s greatest strengths; it has a fixed supply and a mechanism that means less comes out over time as we get closer to the maximum. This is in contrast to fiat currencies where the government can simply print more if necessary.
Not all cryptocurrencies have a fixed maximum supply however, but that does not mean that they cannot still be deflationary. Additionally, there are assets such as Binance Coin (BNB) that have a fixed supply but still have quarterly burns in order to reduce the circulating supply and drive up price.
Create Scarcity and Drive Value
In PancakeSwap’s case, there is no maximum supply of CAKE, in fact it would be quite inflationary if not for the measures the developer team has taken to reduce CAKE supply through both reducing emissions and token buybacks and burns. If Dogecoin were to do something like this, it would likely improve its chances at succeeding long term, but at the moment DOGE is extremely inflationary because over 5 billion enters circulation every year with no end. DOGE is an exception to the rule that scarcity helps drive value, but it is not an exception that works across the board.
The PancakeSwap developer team, as a result, has created an ecosystem in which multiple streams of revenue are used to buy back CAKE from the market and then burn it, in conjunction with votes proposed to users that have also reduced emissions per block. This system has just led to the very first weekly CAKE burn that actually took more CAKE out of circulation than were emitted over the same time frame, meaning if the trend were to continue, every week there would be less CAKE available for people to buy. Here you can see the tokenomics of CAKE, and it is important to remember a project’s tokenomics are important to its potential:
By reducing the supply through burns, whether CAKE or another project, the developer team helps ensure the longevity of the project by preventing the market from becoming oversaturated, and this in turn increase the price of the asset as supply goes down over time and demand goes up.
More and more projects are implementing burning mechanisms in order to help control supply and protect users from inflation.
