INJECTIVE — Burning mechanism: Injective Burn Auction
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📚 I. What does burning tokens mean?
In the world of cryptocurrency, burning tokens is a process that permanently removes a certain number of tokens from circulation. Essentially, burning tokens is equivalent to destroying them, and it’s a way to decrease the total supply of a cryptocurrency.
The concept of burning tokens has become increasingly popular in the crypto industry, as it provides a way to control the supply and demand of a particular cryptocurrency. When a crypto project burns a certain number of tokens, it can help to increase the value of the remaining tokens by making them more scarce. Additionally, burning tokens can also help to reduce the risk of inflation, which can occur when the supply of a cryptocurrency grows too quickly.
There are a few different ways that tokens can be burned in the crypto industry. One common method is through the use of smart contracts. For example, a smart contract may be programmed to automatically burn a certain percentage of tokens each time a transaction occurs. Alternatively, tokens may be burned manually by the project’s developers or community members. In this case, the tokens are typically sent to an address that is unobtainable or non-existent, effectively destroying them.
Burning tokens is often used as part of a cryptocurrency’s overall deflationary tokenomics. Deflationary tokenomics is a model where the supply of a cryptocurrency is designed to decrease over time, leading to an increase in the value of the remaining tokens. This can be accomplished through the process of burning tokens, as well as through other mechanisms such as staking and locking up tokens.
A cryptocurrency with deflationary tokenomics is considered to be a deflationary token. These tokens are often favored by investors and traders, as they can provide a hedge against inflation and are perceived to have a stronger long-term value proposition. The deflationary nature of these tokens can also provide a disincentive for holders to sell, as they may anticipate an increase in value over time due to the reduction in supply.
Overall, burning tokens is an important concept in the world of cryptocurrency, as it can help to control the supply and demand of a particular cryptocurrency, reduce the risk of inflation, and create a deflationary token that is perceived to have a stronger long-term value proposition. While the process of burning tokens may seem counterintuitive at first, it is a powerful tool that can help to ensure the long-term viability and success of a cryptocurrency project.
📌 II. The deflationary nature of the INJ token.
The INJ token, the native token of the Injective Protocol, is deflationary in nature. This means that its supply decreases over time, making each individual token more valuable. The deflationary nature of INJ is primarily driven by the burn auction model implemented by the Injective Protocol.
The burn auction model works by burning a portion of the INJ tokens in circulation. In the case of Injective, 60% of all fees collected on the platform are automatically burned every week. This includes fees collected from all exchange dApps built on Injective. The remaining 40% of fees are distributed to the developers who built the dApps.
As a result of the burn auction mechanism, the total supply of INJ decreases over time, leading to a deflationary effect. The decreasing supply of INJ tokens makes them more scarce, which in turn increases their value. This is because the demand for INJ tokens may remain constant or increase while the total supply of tokens decreases, creating a supply and demand imbalance in favor of the token.
The deflationary nature of INJ has several benefits. First, it creates a strong incentive for users to hold onto their tokens rather than selling them, as the value of their tokens will likely increase over time. This incentivizes a strong and loyal user base, which can be beneficial for the long-term health of the Injective Protocol.
Second, the deflationary nature of INJ may lead to price stability or even price increases in the long run. As the supply of INJ decreases, the value of each individual token may increase, leading to more stable or even increasing prices. This is in contrast to inflationary tokens, where an increasing supply can lead to decreasing prices.
Overall, the deflationary nature of INJ is a key feature of the tokenomics of the Injective Protocol. It creates a strong incentive for users to hold onto their tokens, can lead to price stability or even increases, and helps ensure the long-term success of the Injective ecosystem.
📌 III. The Injective Burn Auction.
The Injective Burn Auction is a novel mechanism that allows the Injective Protocol to destroy INJ tokens, thereby reducing the circulating supply and potentially increasing the value of the remaining tokens. The burn auction is a community-led process in which 60% of all exchange fees collected on the platform are burned on a weekly basis. This makes Injective one of the largest token burning platforms in the crypto industry, leading to potentially deflationary INJ tokenomics.
The Injective Protocol is a decentralized layer-1 blockchain that allows developers to create and launch custom DEXes, DApps, and other financial products. The platform is designed to be fully decentralized, fast, and scalable, which allows it to process a high volume of transactions with minimal latency. With the burn auction mechanism, the Injective Protocol aims to incentivize developers to build on the platform and encourage users to hold the INJ token.
The burn auction process works as follows: every week, 60% of all exchange fees collected on the Injective Protocol are put into an auction. Users can then bid on the fees using INJ tokens, with the highest bidder winning the auction. The winning bidder pays the amount in INJ tokens and receives the corresponding fees collected in the auction basket. The INJ tokens paid by the winning bidder are then burned, reducing the overall supply of the token. A new auction period begins as soon as the previous auction is completed.
The burn auction mechanism has several benefits for the Injective community. First, it incentivizes users to hold the INJ token, as the burning process leads to potentially deflationary tokenomics. Second, it rewards developers who build on the platform, as they are able to earn the remaining 40% of the fees collected on the platform. Finally, it promotes transparency and community involvement in the governance of the Injective Protocol, as the burn auction is community-led and provides a mechanism for users to have a say in the direction of the platform.
An example of how the burn auction works is as follows: let’s say that the auction basket for the week contains $100 in fees collected on the platform. Users can then bid on the fees using INJ tokens. For example, User A bids $90 in INJ tokens, and User B bids $95 in INJ tokens. User B would win the bid with $95 in INJ tokens, and the INJ tokens paid by User B would be immediately burned, reducing the overall supply of the token. The process would then begin again for the next week’s auction.
📚 IV. How INJ token is deflationary and what Injective Burn Auctione is — explained in the video by Confident in Crypto.
