Why Token Burns Are a Poor Substitute for Genuine Demand

Burns are a supply-side trick that ignores demand. A token with zero utility can still have a high burn rate. This creates a false signal of health, distracting from the core question: what drives real, recurring demand for the token?\n- Example: Memecoins with high burn but no protocol revenue.\n- Result: Price pumps are unsustainable, leading to -90%+ drawdowns.

Burn mechanisms often subsidize mercenary capital. Projects like Sushiswap used high emissions (and implied future burns) to lure liquidity from Uniswap, creating unsustainable inflation. The focus becomes bribing users with new tokens rather than building a superior product.\n- Mechanism: Print → Distribute → (Maybe) Burn Later.\n- Outcome: Token price becomes the product, not protocol utility.

Value must be captured from external sources, not recycled internally. Protocols like Ethereum (burn via EIP-1559) and GMX (fee sharing) tie token economics to real protocol usage and revenue. The token is a claim on cash flow, not a speculative burn counter.\n- Model: Fee Capture → Revenue Share / Buyback.\n- Result: Token value is backed by sustainable demand-side pressure.

Binance's quarterly auto-burn uses a formula based on BNB price and chain activity, not direct protocol revenue. This creates a circular dependency on exchange volume and price speculation rather than utility-driven demand.

• Burns are funded by Binance's profits, not user fees.
• ~$600M burned since inception masks lack of native chain fee demand.
• Creates a perception of scarcity detached from the L1's fundamental utility.

Shiba Inu's manual burn portal relies on voluntary community contributions, turning token destruction into a speculative meme. This highlights a system where the primary utility is burning itself.

• Burns are optional and driven by sentiment, not protocol necessity.
• Billions of SHIB burned represent sunk cost, not captured value.
• No sustainable economic model beyond encouraging holders to reduce supply.

While EIP-1559's base fee burn is elegant, its burn rate is a function of network congestion, not application success. High burn ≠ high utility; it can indicate inefficient block space use (e.g., meme coin trading).

• Over $10B burned to date, primarily during speculative frenzies.
• Burns are a tax on usage, not a reward for creating value.
• L2 growth reduces base fee burn, revealing its role as a congestion meter, not a value accrual mechanism.

After the UST depeg, the LUNC community adopted a 1.2% tax on all transactions to fund aggressive burns. This is a desperate attempt to create value through forced scarcity in a network with shattered utility.

• Burns ~$2.5M weekly from remaining user activity.
• Tax disincentivizes the very transactions needed for recovery.
• A textbook case of burns as a substitute for rebuilding genuine demand.

Protocols like BNB and Shiba Inu popularized burns as a core narrative, but this is often a signaling mechanism, not a value driver. Burns are a capital allocation choice that destroys a potential treasury asset.

• No Intrinsic Demand: Burns do not create new users or utility.
• Zero-Sum Game: Value accrual is purely from supply reduction, which is easily gamed.
• Misaligned Incentives: Focus shifts from product-market fit to token price manipulation.

Demand must be tied to core protocol utility. Look to models like Ethereum's EIP-1559 (burn from base fee) or GMX (staking rewards from real fees).

• Utility-First: Value accrual is a byproduct of a product people pay to use.
• Sustainable Sinks: Fees burned or distributed are backed by actual economic activity.
• Transparent Metrics: Track fee revenue and protocol-owned liquidity, not just burn rate.

Projects promising deflation through aggressive burns often rely on ponzi-like token inflows. This is unsustainable and collapses when new buyer momentum stalls.

• Reflexive Collapse: Price drop reduces burn budget, creating a death spiral.
• Ignores Velocity: High token velocity can negate any supply reduction benefits.
• Investor Trap: Attracts short-term speculators, not long-term ecosystem participants.

Analyze the source of value. A high burn rate funded by token emissions is subsidized inflation. A burn funded by protocol revenue is a dividend.

• Key Ratio: (Protocol Revenue / Market Cap) vs. (Tokens Burned / Supply).
• Follow the Cash Flow: Map fee generation to the underlying economic activity (e.g., Uniswap swaps, Lido staking).
• Demand Check: Are users paying because they have to, or because they want the token?