Burn-and-Mint Mechanism(BME)

Why do we need Burn and Mint Mechanism?

Defination

Burn = Sending to an “island” that no one could get to

It is not dissapearing, but sending to an address that no one owns the private key, so nobody could access it. While the transaction is public.

Why

There are two principal reasons why burning coins (or tokens) could be a good thing:

Incentivizing all network/platform participants to work to the system’s advantage;

Achieving consensus in a distributed network more effectively;

Example(Edited by Enzo)

Imagine you are going to buy Dyson vacuum, you need to pay $400 to Amazon.

In web2.0, we send $400 to Amazon.

In web3.0, we take out $400 first, and decide to divide it into

$100 to Amazon platform

$100 to Amazon store wholesaler

$100 to the vacuum product team

$100 to the vacuum factory

We BURNED $400 first, then MINT 4x$100 and distributed to those 4 parties.

If minted assets > burned, then the total supply will increase, resulting in their price to go down.

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Pros and Cons of BME

Pros

BME can be a suitable model if the service is not a pure commodity.

A good business = business development, partnership development, marketing, content, UX, etc. Each contributor is being awarded fairly and transparently with a deserved amount of minted assets.

All of them have clear incentives to deliver a high-quality service, and if the service doesn’t meet expectations, other participants can be protected with a smart contract.

The model can be essential for tokenizing existing businesses. Historical data can serve as a suitable benchmark for the mint function.

It puts creators in control of their product or service. They control their pricing and go-to-market strategy.

The BME does not encourage HOLDing crypto assets. That is to say, if everyone HOLDs assets and there is no consumption (burning), the value of these assets drops. Therefore, the BME model is regarded as a potential solution to the velocity problem of utility tokens.

Con’s

The concentration of wealth in an ecosystem can be quantified by using the

Gini index⁠

. Higher Gini index usually indicates that there is an increased risk for the system to be controlled by a small group of people. When a product or a service is in its early development phase, with no developed market or demand, arbitrageurs can take advantage of the fact that new assets are being minted, thus creating a negative impact on the price volatility.

Assets distribution — In order to utilize the entire BME model and set proper incentives, millions of people need to have assets.

Implementing this model in ERC20 tokens is difficult. There isn’t a default, generic, predefined number of network participants who should receive minted coins as a result of the burn process. In addition to that, smart contracts must be triggered in order to mint new assets.

Conclusion

The Burn and Mint equilibrium model requires both supply and demand in order to work. That fact burdens decision-makers in new businesses but paves the way for the existing players to tokenize their operations.

In other words, once a stable user base and community are formed, putting assets into the right hands becomes a piece of cake. At that stage, the BME model comes in to save the day by providing an effective system for incentivizing people to do their best and make all contributors happy.

Bibliography:

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https://medium.com/mvp-workshop/burn-and-mint-equilibrium-pros-and-con-s-c27d83748cf5⁠

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