Token burns, one of the most cherished features in crypto, permanently remove tokens from circulation. This method is most impactful when it directly affects the circulating supply. For example, burning tokens from a community pool does not impact existing liquidity if those tokens were not actively circulating. Conversely, burns that reduce the active circulating supply provide both immediate and long-term benefits for token value. Such burns can lead to an immediate revaluation of existing liquidity as tokenholders adjust to the reduced supply, reinforcing both short-term and long-term benefits.
At Shade Protocol, we aim to maximize the robustness and meaningful utilization of fees collected through several strategic approaches:
- Buybacks of SHD using fees: Rewarding all tokenholders.
- Distribution of SHD to stakers: Providing real yield.
- Acquisition of more protocol-owned liquidity using certain fee tokens and capital: Reducing emission costs.
We propose adding a fourth category: SHD burn. The current max supply of SHD is 10,000,000 tokens. To date, Shade Protocol has collected over $500k in fees. If even 5% - 15% of these fees were allocated towards buybacks and burns, the max supply of SHD could have been reduced to approximately 9,950,000 to 9,900,000, depending on the estimate used
By having a portion of all fees reduce active circulating supply and reducing long term supply, we reinforce a simple principle for SHD:
- It is scarce
- It is increasingly scarce
- It is deflationary on a long time horizon
By introducing this mechanism, we revive innovative concepts from the Terra era but with a sustainable approach. Our burn mechanism relies on repurposing fees generated from actual usage, ensuring sound economic principles. Terra utilized a minting/burning mechanism where LUNA was burned to mint UST, and vice versa. This system worked as long as there was strong demand for UST. However, the collapse of UST and LUNA demonstrated the risks associated with inflationary or deflationary mechanisms tied to an exogenous collateral relationship between a governance token and a stablecoin. Similarly, Kujira’s aggressive use of KUJI as collateral for borrowing USK (its stablecoin) exposed the token price and dollar peg to high risks. Shade Protocol has learned from these experiences, emphasizing genuine fee generation instead of latent leverage within the system.
Shade Protocol has learned from both of these experiences. If you want to expand the value of the underlying governance token, it is best to do so based via the repurposing of genuine fee generation instead of attempting to infuse the system with additional mechanism based leverage. That is to say, sustainable tokenomics comes from repurposing fees generated from providing a service, not from latent leverage quietly hidden within a protocol.
Using the burn mechanism, over the course of a 30 to 40 year time horizon, Shade Protocol would aim to reduce its total circulating supply from 10M to 5M.
Additionally, reduction of supply sets Shade Protocol up well for expanding supply in the future if it desired to. Additional minting of SHD for focused efforts would come from a place of sound surplus instead of additive inflation.
Hence, we propose the additional following axiom for the SHD token:
- The SHD supply should never exceed 10M
- Additional SHD minting is permissible only if the total supply remains below 10M
In conclusion, the introduction of a structured token burn mechanism reinforces Shade Protocol’s commitment to sustainability, scarcity, and long-term value creation. By leveraging fees to buy back and burn SHD tokens, we enhance the deflationary nature of our token and solidify its role as a valuable and increasingly scarce asset. Learning from the experiences of Terra and Kujira, we are dedicated to a balanced and transparent approach that avoids the pitfalls of latent leverage and unsound economic practices. This forward-thinking strategy ensures that as our ecosystem grows, it remains robust, adaptable, and geared towards long-term success. We invite our community and stakeholders to join us in this journey, as we strive to build a resilient and innovative future for decentralized finance. With these principles in place, Shade Protocol is poised not just to survive but to thrive in the evolving crypto landscape.