It might not make sense in conventional business, but don’t tell that to crypto entrepreneurs. Indeed, for some projects, economist Joseph Schumpeter’s notion of “creative destruction” is taking on a literal meaning in that they’re actively destroying their own money supply – and generating value for investors in the process.
It’s turning out to be an unexpected benefit of the initial coin offering (ICO) model, whereby startups and projects fuel and fund their projects with a scarce digital asset they create. In short, these projects can use the token to price their services, and then strategically alter the economics of the money supply to which they have a direct relationship.
To that end, burning tokens, or destroying the cryptographic keys to these assets so they can’t ever be recovered, has proven to be a selling point for investors, with ICO white papers finding projects promising they will destroy new tokens as they return to the issuer as earnings. Essentially the ask is, if you buy our token now, these companies promise potential backers they’ll trash them as they earn them back.
However unorthodox, one thing is clear: speculators appear to love the model. Take Switzerland-based Eidoo, which just announced that it was burning 1 percent of the total supply of the EDO tokens it created when it did its ICO in November.
Its latest blog post reads: “The excellent news is that we will destroy 920,000.00 EDO tokens starting from August 31st. This means that we are going to permanently remove one percent of the total supply of EDO tokens.”
Sure enough, EDO’s price spiked nearly 40 percent shortly after the post above came out. For Eidoo, this means it earned the tokens it created back as revenue from helping startups to run ICOs on its app. But since it isn’t going about this process alone (the company says it has 200,000 users eager to get in on more sales), it’s jettisoning a full half of the money it brought in by burning the tokens.