Recently, a project by the name of DestroyerDAO was released by a group of unknown developers. The goal of the project? To destroy all other low-value altcoins, colloquially known as s***coins, and replace them with a single ultimate s***coin known as the DestroyerDAO token.
To date, the project has managed to garner enough awareness to earn an invite to the Ledger Status podcast—which typically covers trading talk, controversial projects and the general world of cryptocurrency.
Taking an in-depth look at the project, we will assess its economic viability and address how the trend of burning coins actually affects scarcity and value.
Origins of Coin Burning
The idea of consuming one unit of something valuable to produce something else of value in return forms the basis of much of the traditional economy but is also something that few people take the time to consider.
In a loose way, this system is what underpins the mechanism by which Bitcoin (BTC) and most other digital assets gain value. These essential and expensive lines of code were traded for fiat currencies with a known value, endowing the code with arguably equal value.
This can be equated to fiat currencies being used to pay for the development of an alternate or parallel economy, termed the crypto economy. However, DestroyDAO is proposing that the original system be destroyed and a new one be created. A system in which low-value altcoins are irreversibly destroyed by the process of burning.
The concept of burning and destroying cryptocurrencies to forcibly increase the value of the same cryptocurrency has long been talked about among investors and developers alike. The idea, however, was first introduced by Ian Stewart in 2012—a man widely acknowledged as the original author behind the proof-of-burn algorithm.
Some earlier examples of projects that rely on the proof-of-burn consensus include Slimcoin, TGCoin, and Counterparty. Though, nowadays, there are numerous projects that actively burn a portion of their coin supply to maintain or improve the coin’s value by reducing the amount in circulation.
A handful of these coins are actually quite successful. Binance Coin (BNB), Siacoin (SC), and ANON (ANON) have all had their share of success and notoriety. Other smaller altcoin projects like Equal (EQL) and BitMart Token (BMX), however, continue to linger in obscurity—the token burn strategy apparently doing little to boost value.
How Does Burning Increase Value?
It is important to note that even though the act of burning low-value altcoins and proof-of-burn may sound like one and the same, in actuality they differ considerably.
To elaborate further, proof-of-burn is an actual consensus mechanism where the miners destroy the tokens or altcoins to generate permissions that allow them to write a block.
On the other hand, the trend of burning off a portion of any altcoin’s total supply is a sort of marketing ploy to create the illusion that the remaining unburnt supply has increased in value to match that of the previous supply.
[bctt tweet=”The trend of burning off a portion of any altcoin’s total supply is a sort of marketing ploy to create the illusion that the remaining unburnt supply has increased in value to match that of the previous supply.” username=”beincrypto”]
For example, let us assume 100 BeInCrypto (BiC) tokens are worth a grand total of $100, making each token valued at $1. If we then remove 20 of these BiC tokens from the circulating supply by burning them, we have essentially destroyed $20 worth of value. However, in the cryptocurrency space, this process is done with the hope that the now 80 remaining tokens will inherit the total valuation of $100, making each token worth $1.25.
Of course, you might say that is absurd, after all, if you have $100, and burn $10, you will certainly not magically still have $100 in spending power. However, since the crypto markets are mostly based on market sentiment and expected trends, it often works out better than you may think.
DestroyerDAO relies upon the latter method of coin burning. Instead of self-burning, the project aims to burn other altcoins to raise its own value, similar to burning Venezuelan Bolivars to increase the value of the US dollar.
Could DestroyerDAO Actually Work?
The ideology behind DestroyerDAO’s core concept is that all the low-value altcoins that the project aims to ‘destroy’ at some point had a market value associated with them, no matter how low. By destroying these assets, there would be something of a psychological transfer of value, from the destroyed low-value asset to DestroyerDAO.
In such a case, despite DestroyerDAO having no practical use as a cryptocurrency, it will still offer the possibility of consolidating all of an investor’s losses from worthless projects and exit scams into a single unified asset.
In economic terms, DestroyerDAO’s ideology is based on the principle of scarcity. The developers are hoping that the limited supply of other low-value altcoins would, in turn, drive up the value of surviving altcoins, including DestroyerDAO, by moving the negligible value out of these assets and back into high-quality projects.
However, this is not an entirely well thought out assumption, as to quote Jim Stanford from his book Economics For Everyone (2008)
The problem is not scarcity; the problem is power.
In other words, to create an imbalance in the supply and demand equilibrium of any asset, there first needs to be a measurable demand for the said asset. In the case of DestroyerDAO, there is no apparent demand for the asset.
We wonder how such a glaring loophole in the project’s logic was left uncared for. Perhaps the developers understand very little about market economics, or perhaps they do not even care. Ironically, the only thing that this team might actually end up doing, is creating yet another s***coin—even if it is one built upon the tombs of others.
The Thought Loop
But can such a system work, no matter how absurd? Will negating assets that have little to no value cumulatively add to the appreciation of DestroyerDAO itself?
Despite the absurdity, some people are paying close attention to the project and inevitably, some of these people might speculate that it could actually succeed. These people might then invest in the coin, driving up its value based on the flawed assumption that it has untapped potential.
The question then essentially boils down to ‘why?’ Why do people continue to overlook basic economic principles when it comes to choosing the right project to invest in?
Unfortunately, the answer is rather complicated and has been discussed at length by Jim Stanford in his book. He mentions that the populist misconception about the subject of economics is that it is boring and technical.
To this day, it remains a largely untaught subject in schools and is relatively unpopular even in colleges, leading to a global lack of good judgment on the subject—something those in the know are keen to exploit. He argues that if only people used their common sense to guide their economic decisions, then they would find it to be a largely uncomplicated affair.
This outlook applies to DestroyerDAO as well. The developers and future investors must understand a simple point; scarcity alone cannot drive up the value of an asset.
The rise in the value of any asset that occurs as a direct result of its partial destruction will always be proportional to the cumulative power the asset holders have. If they have no power, ergo in the case of s***coins, there will be no growth.
What is your opinion on DestroyerDAO and the practice of token or coin burning? Can the system ever truly add value to a cryptocurrency or digital asset? Let us know your thoughts in the comments below!