In the Freeos Economic System, Proof-of-Burn is used to curb inflation and support the price. This article explains how.
Proof-of-Burn has been a relatively unheard of consensus method in the blockchain world since 2012. It was originally proposed as an alternative to the computational, and energy inefficiencies of Bitcoin’s Proof-of-Work.
Although proposed, it was seldom trialed as a consensus mechanism and has lingered on the fringes of the blockchain world ever since.
The Freeos Economic System uses Proof-of-Burn, not as a consensus mechanism, but as part of the tokenomics in our system.
This mechanism exists to accomplish two primary targets:
- Decommission FREEOS tokens from circulation to counter inflation.
- Create an internal consensus for the price, and value, of the FREEOS tokens.
Inflate, Deflate
Like our lungs breathing and expelling air, the Freeos Economic System is designed to be a cyclical system.
Having too many tokens in circulation without any use case would rapidly devalue the token—as has been seen in a number of cryptocurrencies, as well as occasionally in some real-world economies.
So, to counter this mechanism, some FREEOS tokens can be voted by the community to be decommissioned (otherwise known as “burning”) by requiring an input of FREEOS in exchange for converting Points to mint new FREEOS tokens—otherwise known as the Mint Fee.
Note: This fee is required only after the AirClaim Phase, once the key governance features are encoded, tested and audited.
When the community votes to “BURN”, the system burns FREEOS tokens in two ways:
- Immediately, if the prospective participant pays the Mint Fee in FREEOS tokens.
- Delayed, if the prospective participant pays in other tokens (USDC, ETH, BTC, PAX, XPR etc.). These tokens are held in a Reserve Pool and can only be voted by the community to be sold at a discount in exchange for FREEOS tokens. Any FREEOS tokens received will be immediately burned as a result of this process.
As other cryptocurrencies have shown (BCH, BNB) burning tokens can have a value on the price—either to move upwards, or to soften falls.
Additionally, it creates a basic, but fundamental, use-case for the token: Burn, to Mint & Earn.
Virtual Mining
Iain Stewart, the original proposer of Proof-of-Burn, uses an analogy to describe the technique:
Burning tokens are similar to purchasing cryptocurrency mining rigs.
In this analogy, a miner burns their coins to buy a virtual mining rig that allows the miner the ability to mine blocks.
Not only does this create a sense of value tied to the cost of the burn—compared to how long it takes to get this cost returned—it also consistently employs a basic use-case: “Burn, to Mint & Earn”.
Similar to how cryptocurrency miners need to upgrade and replace their equipment, participants need to burn new tokens to maintain access to the earnings.
An alternative model to taxes
Another, similar analogy comes from how governments tax their citizens, and how this can actually help maintain a national currency’s price floor.
Imagine a government wanted to issue its own cryptocurrency (let’s call it GOVT).
Why would citizens or businesses use and accept the GOVT token?
The demand for a token is one of the key challenges for nearly every crypto project. It is a challenge that governments do not need to consider.
All that this imaginary government needs to do is enact a law that all the taxes must be paid in the GOVT token. Citizens and businesses will now need to obtain these GOVT tokens to pay their taxes—or face the consequences (fines, liquidation, jail).
No need to worry about demand any longer.
People and businesses will accept payments in GOVT because they know there a base demand for it — and the existence of a “base demand” means this token also has a base value.
When the taxes are paid back to the government, imagine these tokens are burned instead of simply going to the government coffers. As mentioned prior, this offers an economic deflationary mechanism each time the tokens are burned.
As long as the demand for tokens is equal or higher than the supply, the government can issue more tokens without the price of the token going down (devaluing). This demand is related to tax obligations and the velocity of the token (trading or HODLing).
As not all the GOVT will be used for paying taxes, people and businesses may also use it for payments. Payments adds a richer use case and increases the demand—and therefore increases the value of the GOVT token.
Now with the Freeos Economic System, imagine that—instead of taxes paid to— people burn FREEOS tokens to mint further, and greater amounts of FREEOS tokens from the the Points they have accumulated for their voting efforts.
So— instead of the government minting tokens for itself to then lend to banks that then finally lend to the people — the government IS the people?
And then, these same individuals can trade their FREEOS tokens for goods and services—thus increasing their wealth from this base.
This is essentially the Freeos concept.
And this economic bang, starts with but a single flame.
For more on Freeos, please check our webpage for more info, or join us in our Telegram Community where you may ask more questions about how Freeos is intended to work.
