Introduction

Burning or redemption mechanisms (Burn-Redeems) offer a twist to NFT collecting, making the act more interactive than has been the case historically.

Many NFTs have just been held or sold previously, but can now be spent as well, and the past weeks have consequently seen many burns as a result.

This write-up defines the types of burn mechanisms, their history (longer than you might expect), and a perspective on their future. Enjoy.

Article Outline

• History of Burn-Redeems

• Mechanisms

• Motivations

• Risks

• Future Trajectory

• Closing Remarks

History of Burn-Redeems

Origins from the ERC-20 ICO Craze

Burn-Redeems have existed since 2017 with ERC-20 tokens. During that Initial Coin Offering (ICO) craze, many tokens that launched would burn some existing supply to induce scarcity, with $LEO as one example (Binance still does this with $BNB today). Amongst the many burns, burn-redeem mechanisms were incorporated by tokens like $TKN.

$TKN still exists and has the interesting mechanic of burning tokens to redeem funds from a community chest. The company behind the token, Monolith, offers a service to buy crypto with a credit card. A fee on every transaction is charged, and a portion of that goes to the community chest. Token holders can redeem at a prorated rate, so holding 1% of the supply could allow the redemption of 1% of the community chest.

Transition to NFTs (ERC-721 and ERC-1155)

The Burn-Redeem adoption in NFTs wasn’t seen until January 2021, with the launch of Crash + Burn by @mad_dog_jones (a project Manifold was involved in).

This is an indicator that NFTs, especially ERC-1155’s, are adopting similar mechanisms that ERC-20 tokens did in the years following their growth.

Nonetheless, with NFTs, Burn-Redeems are far more exciting. Tokens gain the property of being a currency as well as a piece of art, introducing individuals opportunities for curation. Further, since Open Edition (OE) NFTs tend to come out in sequence, these mechanisms can be used to build on-chain community games that play out over weeks or even months.

Burn Redemption Takes the Traditional Art World by Storm Until recently, the most notable Burn-Redeem was Currency by Damien Hirst, launched in July 2021. Mr.Hirst created 10,000 physical pieces and made them extremely difficult to forge. These were digitized and offered as NFTs, and holders had the choice to burn the NFT for the physical edition. When the burn window closed, there were 4,851/10,000 NFTs left.

It was an innovative process that suggested a relatively even split of preference for physical versus digital art. Perhaps an interesting psychological experiment that could dictate the direction we are heading with the traditional art world?

There were some custom Burn-Redeem mints that launched after Currency, including The Great Color Study by Alpha Centauri Kid and checks notes a tungsten wholesaler, TungstenDAO. The relative difficulty of implementing them meant there weren’t too many more until Manifold’s announcement in November 2022, making Burn-Redeems public.

Mechanisms

With an increasing number of Burn-Redeems, some main strategies have formed that are defined below. These use a combination of burn mechanisms and allowlists, and so both are outlined.

Burns and allowlists accrue value from the promise of future mints. Holding an NFT (most recently open edition NFTs) creates anticipation that the token can be redeemed for a future asset, for instance a more scarce piece by the artist.

Gamifying a single piece can be done by burning that piece (one-time use), or by making it a claim piece (potentially multiple uses).

Sets of tokens can also be made burnable, or eligible for allowlists. These options essentially use the same strategies to the opposite effect, one with no net supply growth, and another with supply growth within the hands of existing holders.

The most common method of Burns has been by creating an initial “currency piece” that is exchanged for another redeemable piece. Such was the case in Proceed w/ Caution by Lucrece, read our full write-up here.

Sometimes multiples of a currency piece are required, which tend to accrue value consistent with the underlying redeemable asset. For instance, if Grant Yun is suddenly announced as the next artist in an NFT redemption then the related currency value will likely increase consistent with the market value of Yun’s work.

Here’s another recent example with Devon Figures and The Gift Shop, whereby the initial piece of the Pingers piece is used as the currency NFT which can be redeemed for future artist collaborations. Currently, the currency NFT is valued below the two artists’ works, so one can assume that the market is anticipating a less well-known artist in upcoming collaborations. Whereas if news comes to light that there’s a renowned artist then this could drive positive price action to the piece.

A final example of a burn with multiple currency pieces is in Ness_Graphics’ “Money Printer go Brrrr”, which also marked one of the largest open editions by primary funds raised in the past weeks. 20,357 pieces were minted for 0.069 each, bringing in 1,404 ETH in total. The redeemable piece costs 5 currency pieces.

Motivations

So why spend a currency piece on a new NFT by an artist?

There are three key drivers:

1. Redeemable Pieces are Scarce

   Redeemable pieces will almost always have a lower supply than the Currency Piece, so some appeal is in a rare piece by the artist. You’re consolidating the currency item into a potentially more valuable, harder-to-obtain, asset.

   Take Ness’ example noted above - it requires five single OE items to be burned to redeem an item in the next phase.

2. The Potential for Set Burns or Allowlists

   Set burns and allowlists are usually based on multiple redeemable pieces that came out before.

   The key example here is the Proceed W/ Caution by DesLucreces. There are hints suggesting that collecting all eight colors will enable a burn that consolidates into a single rare piece. Many of his audience have been scrambling around to obtain all eight pieces, playing along with the game theory.

   One holder even acquired all the Raspberry colored items on the market to create a supply squeeze for the complete set. They played market maker, charging a premium to late collectors.

3. Redeemable Pieces Can Become Currency Pieces

   Redeemable pieces can become currencies for new tokens, or they can become the main currency piece an artist uses.

   A great example is Checks VV by @jackbutcher, where each redeemable piece is a currency piece too. Checks can be traded in for rarer versions, which can be traded for even rarer versions, and so on. The final version would require 4,096 base Checks to complete, read our thread for a more detailed write-up.

Future Trajectory

Within Web3 today, Burn-Redeems offer the prospect of a game, which may appeal to many. The low barriers to entry with open editions mean many are releasing and buying Burn-Redeem NFTs, but not all mechanisms indicate elaborate game theory. Both collectors and artists should carefully assess the decisions they make.

We’ve seen several artists acknowledge the open edition meta, but announce their intention not to partake to prevent damaging their brand or diluting their existing collections.

The novelty of art as currency is likely here to stay for a different reason. There exist today many exchanges to allow the swapping of ERC-20 tokens, and we can potentially see the same for ERC-1155 tokens, assuming they follow the same path. ERC-1155 may end up acting like a fungible equivalent, but with a significantly reduced circulating supply. This could even allow us to spend these types of NFTs across work by different artists

Impact on Royalties

This will force the question of how to faithfully account for royalties. Will there be a single harmonious royalty allocated for these types of tokens? How will that royalty rate be calculated, and what currencies will it be paid in? Will the artist who’s token you spent be the recipient of those royalties? Or will this go to the originating contract deployer?

Cross Chains Burns

Burn-Redeems could also play a role in bridging NFTs across chains. Some use of either Oracles or centralized services will be required, however, these mechanisms could delete semi-fungible NFTs (ERC-1155’s or equivalents) from one chain and spawn them on another.

Burn Redemptions for Physical Goods

There’s also plenty of creative in person use cases for Burn-Redeems. One that excites me is having tickets for events be currency pieces that can be redeemed for merchandise after the show is over. VIP tickets could have a higher redemption value, which further broadens the underlying utility for these NFTs. A stark distance from the current PFP utility that is prevalent.

Risks

There are risks associated with creating open editions if not approached carefully.

Dilution

Open editions are often created by Web3 artists with existing bodies of 1/1 work. These standalone pieces often command high value as a result of being unique. Excessive minting of open editions could negatively impact the scarcity of the associated artist’s work, which could then hurt the value of their 1/1s. This can be mitigated with careful planning.

Sentiment

Collectors often check an artist's prior work before minting anything current, and if pieces tend to be below their mint price, it could dissuade some potential collectors. Releasing open editions without a structure could result in older ones being forgotten, impacting an artist’s ability to generate new sales. Ideally then, each open edition is created with a reasonable purpose, whether publicly known or otherwise.

Speculation

Releasing an open edition will result in many different types of collectors purchasing an artist’s work. One type will prominently be speculators that purchase with hopes of being in a project early that could become sensational. Artists can expect such speculators to ask things like “wen burn?” and should carefully consider the details to be made public and what to be kept as a mystery.

Closing Remarks

The mechanisms are manyfold (pun intended) and we hope this article helps you analyze Burn-Redeems you come across. Not every Burn-Redeem is part of a greater plan, so it might indeed be best to proceed with caution.

Open editions increase artists’ accessibility to collectors. In this paradigm, artists’ voices are amplified and collectors have new bodies of work to explore. Today anyone can create an open edition, naturally leading to market saturation. What separates one from another is the depth of the offering.

An ideal open edition using burn-redeems is akin to an iceberg; there is something to be seen on the surface, indicative of a greater structure underneath. Anyone can spend some minutes creating a patch of floating ice, but the care to plan out an iceberg is far more involved. Collectors will get better at spotting them, and the most successful artists will have planned accordingly.

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