❗️🫧Burning: Decrease supply
Burning tokens means removing them from the circulating market, which can be done in the following two ways:
1. Manually send it to an unclaimed address.
2. Create a contract that holds funds but cannot be spent.
Although the token contract does not 'clearly' reduce circulating supply, either method will render the burned tokens unusable. The burning action is similar to the destruction of currency in the traditional financial system or irreversible loss (i.e., destroying old banknotes and replacing them with newly printed ones). In practice, these two forms of ETH or ERC-20 token destruction are often used, whether intentionally or unintentionally. Verification addresses and registration contracts 'can prevent accidents from occurring.
A more common practice is to intentionally include a token burning feature at the design stage of the smart contract.
Here are two examples of algorithmically burning tokens:
·Indicating the existence of a funding pool and redemption target (more common in equity tokens, such as Compound's cToken).
·Increase scarcity to raise prices (for example, AAVE, and the minting tax algorithm stablecoin model, like Basis/ESD).
·Punish malicious behavior.
❗️🫧Minting: Increase supply
Corresponding to burning is minting, which increases the number of circulating tokens. Unlike burning, there is no accidental or manual minting mechanism. Any minting mechanism must be directly encoded into the smart contract. Because minting can incentivize broader user behavior.
There are many examples, such as:
·Indicating entry into a funding pool and obtaining the corresponding ownership share (common in equity tokens, such as Compound's cToken).
Reduce scarcity (increase supply) to lower the coin price (minting tax algorithm stablecoin model, such as Basis/ESD).
·Reward user behavior
Using increased supply (inflation rewards) to incentivize users is a common practice, which can enhance liquidity or encourage users to use a specific platform. As a result, many users engage in liquidity mining (yield farming) to seek the highest possible rewards. Platforms can guide users to participate by issuing tokens with additional value in the network. Users can hold tokens in the platform network and deploy them on the platform, or sell them for profit. In either case, adopting tokens in the platform usually increases activity 🍀