Burn Notice

18 min readDec 10, 2024

The contents of this article should not be construed to be financial or legal advice. Nick is not a financial or legal advisor. The opinions in this article are his alone and are subject to change without notice.

Hi, I’m Nick. I’m a gaming tokenomics designer that’s been in this industry for a bit. I founded and am a partner at Win Win, a leading game tokenomics firm that’s worked with a wide variety of games, some of which you have heard of, and some of which you will hear of when they launch. Due to my position, we see a lot of tokenomics designs and are regularly thinking about the new metas in the industry.

One of the concepts we see constantly across all token designs both within games and outside of games is the mechanic of a Token Burn. It deserves a lil deep dive.

What is a Burn?

It’s simple really; tokens that were previously trade-able are sent to a ‘burn address’, which is a wallet that no one controls, and thus are permanently out of circulation.

A basic understanding of economics should allow you to conclude that, yes, burns are great! They reduce the available supply of a token, and therefore, with equal demand for the token, the price per token should be higher.

When looking at the total value of a token ecosystem, this makes perfect sense. The lower the supply, the higher each individual token in the supply should be worth. Simple supply and demand.

However, when a burn occurs, the price doesn’t immediately reflect this reality (take that, proponents of efficient market theory). This is because the only thing that impacts the price is buy and sell orders on the market. Since a burn is not a buy or sell order, the price does not move. The burn creates an impression that the value is different, and therefore humans will want to arbitrage the opportunity, creating the price change.

Ostensibly, it would be a great idea for an opportunistic trader to buy tokens right after a burn occurs as they would be getting a discount on the ‘true value’ of the token. Over time, the price per token should once again reflect the value contained in the token ecosystem since no value was lost in the burn.

If token ecosystems want to drive more excitement to the token’s prospects over time, then a burn makes perfect sense. Over time, as more tokens are burned, the value of any tokens still held by the community or the treasury would be intrinsically worth more.

When considering how best to distribute value to a community of token holders, burns are currently understood to be an efficient model. When a token is burned, the value within that token is redistributed instantly and equally to all other token holders. No dividends required!

Burns really took off in token design because of this value redistribution feature. They began to crop up in nearly every tokenomics design that prioritized giving back to the community. And now, if a prospective holder sees a burn on the tokenomics plan, it’s bullish.

Just put a burn in there. No one knows what it means, but it’s provocative!

Let’s go to some numbers to see what burns could do for a token ecosystem.

We have Fun Game Token $FUN with the following tokenomics:

Total Supply: 1,000,000 tokens
Circulating Supply: 100%, no vests
Current Price: $1 per token
Fully Diluted Value (FDV) and Market Cap (MC): $1,000,000 (1,000,000 × $1)

The foundation burns 300,000 tokens (30% of the total supply).

New Total Supply: 700,000 tokens
Circulating supply: 100%, no vests
Current Price: Still $1 per token
FDV and MC: $700,000

For the FDV and MC to reach $1,000,000 again the price per token needs to be $1.42.

In theory, the price should rise to $1.42 because the intrinsic value of the ecosystem (market cap) didn’t change, and the value is just distributed amongst remaining token holders… right?

But what if… the price doesn’t ‘rebound’ there? Was value destroyed somehow?

For the price to rise, someone needs to put in the buy orders. If no one buys, then the price remains static.

So to reach the ‘par value’ MC, buyers need to put in more value to the ecosystem for the total value to remain… the same as before the burn? Something doesn’t track.

Where did the value go and why is more value needed to get back to the par value MC? Was the value burned? We burned tokens and ended up with a lower MC and FDV — how did this happen if all the token value was retained in the ecosystem?

With the above being true… that means burns are actually FDV and MC destructive.

Burns are FDV and MC Destructive

The formula for Market Cap is as follows:

Market Cap = Circulating Supply * Price per Token

Therefore, if circulating supply decreases with a burn, then the market cap necessarily needs to go down.

Similarly, Fully Diluted Value = Total Supply * Price per Token

As total supply decreases, FDV would fall too if burns are considered when looking at total supply. According to CoinMarketCap and Coin Gecko, the burn address IS considered in their calculations for total supply.

Behold, the definitions on CoinMarketCap:

Max supply: The maximum amount of coins that will ever exist in the lifetime of the cryptocurrency.
Total supply: the total amount of coins in existence right now, minus any coins that have been verifiably burned.
Circulating supply: The best approximation of assets circulating in the market.

When CoinMarketCap calculates FDV, it queries the burn address. Any burned tokens are no longer considered in the Total Supply or Circulating Supply, which are the numbers used in their formula to determine FDV and MC.

Therefore, burns definitively are FDV and MC destructive.

But what if… we didn’t use the burn address. Giga brain move right here.

Instead, what if we sent the tokens to an address with a verifiable 1,000 year lock, effectively burning them without triggering the ‘verifiable burn’ metric in their formulas? Talk about opening pandora’s box. Say goodbye to consistent data reporting…

Short term, that probably works. But if the token gets big enough to warrant an actual human looking into it, CoinMarketCap will actually adjust the data to better reflect the true nature of the token (as noted on their website). This means even if the token ecosystem uses a wallet address with a 1,000 year lock, CoinMarketCap may determine that this is effectively a burn and report it as such, after an annoying internal data team meeting. Save Kevin the hassle, would you?

If burns are FDV and MC destructive, would the opposite be true for a token that increases its supply? Interestingly… yes. If someone were to create a token with an uncapped supply, and then dripped it into a 1,000 year locked address (to increase circulating supply and total supply without impacting anyone’s ability to sell) then this actually would increase the MC and FDV indefinitely. Someone is inevitably going to try this. Stay safu out there.

It’s time to understand where that value goes. Or rather, where it didn’t go.

What are Burns, Actually?

To arrive at an answer of “are burns good or not” we’ll need a more useful definition of a burn. Previously the definition was simple:

Tokens are removed, but the total value of the ecosystem didn’t change, so each token is intrinsically worth more. Burns are deflationary, meaning the value of each token is theoretically worth more as less tokens exist.

To arrive at a more nuanced definition, consider this example

A burn usually occurs in one of 2 scenarios:

The Foundation burns some amount of tokens from the treasury
A tax on every transaction is burned

This transaction can either go to another person, meaning the recipient loses out on the tokens they would have received
Or it can go to the treasury, meaning the treasury loses out on the tokens

For simplicity, let’s assume the burn is taken from the treasury.

If the treasury sold ALL of its tokens, the maximum value it would be able to extract would be whatever value is in the liquidity pool. This would kill the market completely, of course.

Therefore, the true value is not actually in the tokens themselves. The value is in what the market is willing to pay for the tokens because of what those tokens can be used for. This value is whatever is contained in the liquidity pool, plus buy-side liquidity.

It follows then, that the act of burning a token is not lighting value on fire, since the liquidity didn’t change at all. The value didn’t go anywhere. It’s still sitting in the liquidity pool. Burning is not value-destructive. The act of burning treasury tokens simply reduces the ability for the treasury to sell into the liquidity pool.

And thus, we arrive at our nuanced definition: Burning is a reduction in someone’s ability to sell and impact the price.

Now for the caveats: While over-the-counter (OTC) deals do exist, we should assume that if the liquidity pool is empty, no public market exists for the token. On the flipside, lower FDVs imply easier OTC deals with certain valuation-sensitive counterparties. Burning a token reduces the treasury’s ability for it to sell or leverage the token to raise more.

Deflationary Redistribution

At this point we know burns are FDV and MC destructive, but the value itself isn’t destroyed. But what about burns being deflationary? Surely this is positive for the token price right?

When considering if burns are deflationary, the answer is relatively straightforward — yes, they are, because they fit the definition. Deflation simply means the supply is decreasing. A common knock-on effect of deflation is the value rising, but that isn’t actually happening in this case, unless someone believes that each token is worth more as a result of the deflation and is willing to pay more for it. Vice versa, for inflation (or really debasement), each token is still worth the same amount at the moment of distribution, but someone gets a larger ability to sell if they receive emissions. When the sell occurs, everyone’s tokens are worth less.

Burns are, however, impactful to price sensitivity over the long term. If burns continue to happen, fewer tokens are circulating, and fewer parties are able to and willing to sell, the price may jump more readily when demand pours in unexpectedly.

Contrary to popular belief (and my own, as of last article), burns are NOT value redistributive. This is because the value didn’t actually move. The value is still in the liquidity pool.

I used to think burns redistributed value because the ecosystem value would stay the same across a total pool of tokens. But this is actually not the case, because value was never distributed equally across tokens in the first place. (wait wut?)

The value within the ecosystem is distributed based on when someone chooses to sell, in accordance with the price decreasing along buy-side liquidity. When buy-side liquidity runs out, the token’s value hits 0.

Therefore, a token’s value is determined based on when that token is sold when compared to all other tokens in that ecosystem. The current price is the highest value that token can fetch when all potential sellers are taken into account. The difference between the market price (what buyers are willing to pay now) and realized value (what the seller gets based on market conditions) reminds us that token value is a collective and market determined. It is only when you sell that you realize that value.

When a burn occurs, the value that was in that token isn’t distributed or destroyed at all. That token simply ceases to exist, and one less token can be sold.

The true ecosystem value of a token is ultimately limited by the liquidity pool depth and the willingness of buyers to absorb sell orders. However, this ecosystem value is not the MC or FDV — it’s guaranteed to be less.

Price, and therefore MC/FDV, falls as tokens are sold. The token will hit 0 far before the current MC is fully distributed to parties.

The true ecosystem value is actually composed of 3 sources:

The liquidity pool (LP tokens)
The amount of buy orders in the market (buy-side liquidity)
The amount the market makers are willing to spend to support the markets being made (buy-side liquidity)

If all 3 disappear, you’re donezo. The true ecosystem value is somewhere below the MC, but no one knows the true number because it’s… variable. It’s determined by buyer interest. Thus, this is the game. At what point is the price valued too highly as compared to everyone that can sell? How many people need to sell at the same time for the true ecosystem value to be maximally extracted?

Burns and Emissions: Yin and Yang

When emissions enter the ecosystem, additional tokens are added to the pool of sellable tokens. The opposite effect is true with burns — those tokens are removed from the pool of sellable tokens. Therefore, emissions and burns are opposites, by nature. If, for example, a token is emitting at a rate of 5% to stakers, and the treasury is burning 5% in the same time frame, these 2 forces cancel each other out. Importantly, no value was transferred in the liquidity pool, so no price change occurred.

It can be concluded then, that burns negate emissions, with some caveats. If a Foundation wishes to maintain a perception that there are no emissions, implementing a burn is a pragmatic solution. In this way, the Foundation can release locked/vesting tokens over time without having the impression that price will fall. Of course, this is a perception of price impact for both burns and emissions, and it still might not work as an exact counterbalance. For example, holders may view emissions to be more bearish than the bullishness of a burn, since we’ve seen that a burn doesn’t actually do much to the fundamental value while emissions are likely to be sold.

What if there was a situation where ALL tokens spent in transactions are immediately burned? Would this make the project more bullish? If everything is burned, would it even be possible for the token to continue functioning in the ecosystem?

Due to the divisibility of tokens down to 18 decimal places, the actual number of tokens in the ecosystem doesn’t matter in the slightest. You can have a token ecosystem with 0.1 tokens and it can still function perfectly well. Nearly all tokens in an ecosystem can be burned because the remaining tokens are still able to be sold. The party holding the remaining tokens determines what price they are willing to sell at. In this way, the party holding the remaining tokens becomes the seller of last resort as all burning parties are reducing their stake.

Buyback and Burns

Adding a Buyback before doing a Burn does change the situation slightly. By purchasing tokens on the open market, the price is gradually moved upwards as the buys eat into the sell-side liquidity. Then, those tokens are immediately sent to the burn address, effectively ‘trapping’ that value in the ecosystem. The Foundation, choosing to remove them from circulation, guarantees that they will not be the seller of those specific tokens.

The tricky bit about this strategy is the massive scale it has to happen on for it to matter. While buybacks do positively impact the price, ever greater amounts are needed as the market cap increases. It’s better to use that capital to grow the ecosystem and its offerings because the impact of buybacks are like dripping water into a lake through a straw whereas using the capital to grow is like building a pipe.

For example, if you have $100k that you would use for buybacks, and your token is at a humble $10m market cap, your $100k buyback and burn moved the market cap 1%. Would it not be better to use the $100k for growth opportunities that could grow the ecosystem’s prospects by more than 1%?

Buybacks aren’t bad, they’re just not super effective when the alternatives are considered, especially in a bull market. If there’s nothing else the protocol or ecosystem wants to build, then it could be the right call. Burning the token does trap the value into the ecosystem but there’s more effective ways to create value accrual.

Opportunity Cost of Burns

Given this analysis of burns, the cons and pros of a burn are as follows:

Cons:

FDV and MC destructive
Reduces the ability for the Foundation to sell, in order to access capital

If the Foundation is the primary liquidity provider in the pool, then they own the majority of the liquidity in the first place. Burning excess tokens doesn’t actually matter to the Foundation since they own the liquidity provider (LP) token

3. The Foundation could do literally anything else with the token, like use it to incentivize community members or professionals to do work for the Foundation.

Pros:

Reduces circulating supply, decreasing the amount of potential sellers
Counteracts emissions, if they exist
Reduces the Foundation’s ability to sell against community
Bullish narrative, as perceived by the public

Would it be better for the long term health of the ecosystem if the tokens went to the treasury instead of being burned? This would allow the treasury to have more flexibility, but it really only matters if the tokens can be sold or used effectively to grow the ecosystem in the first place.

Effective use of tokens include distributing them to individuals who could help grow the ecosystem’s value via stipulations for distribution, using them to obtain more capital via sells or OTC deals, or partnering with communities to perform larger scale swaps. Generally it is better for stability of the ecosystem to have more parties hold the token than less, as it’s less likely for everyone to sell simultaneously.

If the tokens can’t be sold or used effectively, it actually might make sense to burn them… if there’s any upside for doing so. Given the pros list, that upside would be counteracting emissions (for narrative purposes) or for a bullish narrative (for more narrative purposes).

If the only benefit of burning is marketing, then the question is: at what point should the Foundation trade their ability to sell the token for a boost in marketing? Assuming the Foundation is comfortable marketing a burn of course (check with your lawyer on the legality of this, NFA).

If there isn’t a ton of value in the liquidity pool and the Foundation is sitting on a large percentage of the circulating supply, this actually might be a good trade — though taxes and accounting should be considered. The Foundation can’t liquidate all of their tokens regardless, so burning it in order to spark a community-focused narrative may actually be the optimal strategy! This assumes OTC deals outside of the liquidity pool do not exist.

In essence, this can be considered free marketing. Because in this case, treasury tokens cannot be liquidated anyway, burning tokens is pure marketing. It’s not even marketing spend, it’s just free. The treasury can’t do anything with those tokens outside of distributing them, and if they are distributed, they might be sold anyway. Better to burn them for an attention boost rather than have them sold by farmers, which impacts the price.

Burning is just about narrative?

When everything else is stripped away, it becomes clear that burning simply is a narrative mechanism. It works to boost price because people believe it works. It’s bullish because everyone believes it’s bullish.

Burning tokens does not cause any fundamental change in value.

The only instance in which burns serve any functional purpose is when they counteract emissions. This helps to negate the expectation of sell pressure, which can be almost as cancerous to price as sell pressure itself.

My research assistant did a bit of digging on gaming tokens that had burns to see if the impact was seen in the price charts or in market cap. But unfortunately the answers weren’t very clear. It’s quite difficult to isolate the burns and their resulting effects since burns are often performed over time, conducted with buybacks, or mostly conflated with broader crypto or macro price movements. If you’re curious of the tokens we did look into, please see this spreadsheet. And then you’ll understand why this entire article is abstract and philosophical. Kind of the only way to present it well in my opinion.

Worth noting, many of these teams seemed to perform burns as a desperate last-ditch attempt for mindshare after a continual losing streak from airdropped farmers selling en-masse. So take the results with a grain of salt.

If burns are just about marketing, the question to ask is: how should a burn be structured to optimize for marketing and awareness?

There’s 2 main options: burning over time, or lump sum burning.

When a token is burned over time, prospective buyers may view it as continual deflation and therefore value accrual (even though we now know that it’s not). Despite this, small burns over time aren’t a marketing beat, they’re more of a business strategy designed with the hope of sustainability (but it doesn’t actually impact the price or value at all). Further, if a burn is expected, the supposed value of that burn may already be priced in.
When a token is burned in a large lump-sum in a single moment, the game or protocol can make a big deal out of it, such as when MAX burned 20% of their token supply a few days after TGE. Since we know burns are best used for marketing at this point, it can be concluded that burns over time will not be as effective as lump-sum burning.

From an awareness lens, burns that are known and expected get ‘priced in’ and forgotten whereas unexpected burns have the potential to generate a lot of attention and buzz. The token content treadmill must be fed to cultivate and manage attention.

If a Foundation is looking to maximize the excitement of a burn, it might be most advantageous to involve the community in the process of the burn, since after all, it’s a narrative. Running an engagement campaign that is tied to an eventual burn might be a solid idea. For example, for every 100 people who complete level 5, an additional 5,000 tokens are burned. In this way, many token holders view a burn as incredibly beneficial to their bags (even though it isn’t), and are therefore much more likely to perform the actions outlined by the Foundation.

To go further, make the burn an experience. Create a deluge of memes of “burning money”, to show that the Foundation is well capitalized or in such a stable position that burning their own treasury is of no consequence. Lots of activity on discord? Burn randomly. Lots of spend on-chain for a particular day? Burn more. Token hits all time high? Burn celebration. This is essentially free only if the treasury wouldn’t have been able to be liquidated in the first place.

Burns work because everyone believes they work.

Burns will continue to work as long as people believe they work, which could be a long time. Deflation FTW!

I hope you learned something today.

Just be aware that if you do choose to burn, these are the fundamentals:

Burns do not redistribute value
Burns mechanically do not impact the fundamental token price
Burns make the token price more sensitive in aggregate
Burns decrease the FDV and MC
Burns can be sent to a 1,000 year lock address to avoid decreasing the FDV or MC, but if the token gets big, this will be adjusted manually
Burns counteract emissions
Burns cause a token to be deflationary but that does not mean the price or value per token rises
Burns are free marketing only if the treasury can’t sell all of its tokens or do something more useful with them
Burns are best when they’re used to rally a community around a cause

Ultimately it’s up to the Foundation’s discretion to want to do a burn. Burns are not unequivocally bad or good, but burns are not the silver bullet that will save your token ecosystem. Burning tokens is also NOT lighting your own treasury’s money on fire, unless you reach the point where all the tokens in the treasury can justifiably be sold now, or in the future.

Finally, here’s a burner:

Or rather 5 of them. 10 points if you can name them all.

Nick is a founder and general partner at Win Win, a gaming tokenomics firm. He’s a lifelong game designer and has professionally designed a wide variety of games including board games like Jumanji and Hail Hydra, reality show challenges for Survivor, and crypto games for the past few years.

Nothing in this article should be construed as financial or legal advice. Nick is not a financial or legal advisor. He is a game designer that happens to have learned a lot about crypto and the underlying mechanisms that make it work.

I’d like to thank the following individuals for their peer reviews, thoughtful comments, and helpful adjustments to make this article the best it could be:

The Win Win team — Matt Cheung, Daniel Paez, Jack Leung
Kiefer Zang — HLV, and newest addition to Win Win as of next week
Alex Wetterman — Shima Capital
JACL — Delphi Digital
Sonny Tsiopani — Visund Ventures
Sam Peurifoy — Hivemind, Kap.gg
Shannon Low — Lyrik Ventures
Mo Patel — Sfermion
Matthias M.L. — Kutur Runway
Steve Ip — Conductive.ai
Ric Moore — Oxalis Games: Moonfrost
Michael Arnold — Mighty Bear Games: GOAT Gaming
Chris Heatherly — Great Big Beautiful Tomorrow: The Mystery Society
Matthew Schmenk — Avalanche Gaming