It goes without saying that anyone involved in DeFi recognizes the benefits of making a token deflationary through ongoing token burns to reduce the circulating supply. While a reduction in circulating supply makes sense for the $DOWN Vault token, the issuance method of $DOWN makes it counter-productive to directly burn tokens, due to the fact that the tokens are redeemable for ETH in the event of a buyout of the NFT that underpins the tokens.
Tokens sent to a burn address or ‘dead’ wallet would therefore no longer be available to be redeemed for their proportional ETH in the event of a buyout, leading to “frozen” ETH that can only be claimed through the redemption of $DOWN.
To offer a simpler explanation; the $DOWN Vault NFT currently has a reserve bid threshold of 500 ETH. Assuming that there are no concurrent bids if the reserve is met, then the total issued supply of $DOWN at the time of sale would be redeemable for a total 500 ETH. If 10% of the tokens’ supply had been burned prior to the buyout (by being transferred to a traditional ‘burn address’), then 50 ETH would from the buyout would be ‘locked’ in the smart-contract forever, due to it being impossible to recover the burned tokens, along with the inability of the smart-contract to calculate the adjusted token supply and associated allocation of ETH per token based on the adjusted values.
Alternatively, using $DOWN’s underlying NFT as the destination for any strategies intended to reduce token supply acheives the same result, with added benefits.
These added benefits, if not already obvious, are the following:
- Any $DOWN held in the $DOWN Vault NFT is able to be redeemed for its’ proportional share of ETH after buyout, providing any would-be buyer with an instantly available rebate of their spent ETH. (With a current minimum of 10% based on the 1,000,000+ $DOWN tokens held in the vault)
- In accordance with the existing “quantum compounding” mechanic, any $DOWN “burned” to the Vault is both affected by the value-compounding effect of the $DOWN previously held within the NFT, as well as increasing the magnitude of said effect with each new ‘burn’.
Hopefully we’ve explained this concept in a manner that isn’t terribly hard to visualize or otherwise make sense of; since honestly, the nature of “quantum compounding” is inherently paradoxical, and we’re not certain exactly how to calculate additional sources of the same effect. To simplify the overall message of this post, we’ll ignore the theoretical compounding value increases to state hard facts for reference.
If the $DOWN Vault NFT is acquired at a cost of 500 ETH, the initial 10% supply held by the NFT would allow the buyer to redeem the contained $DOWN tokens, burning them permanently to receive 50 ETH (10% of the 500 eth purchase price). Any additional burns through the lifetime of the project therefore increase the buyers redeemable ETH after buyout. Before a buyout though, “burning” 100,000 tokens to the vault would reduce the circulating supply by 1%, hypothetically increasing the tokens value solely based on the supply reduction, while also increasing the tokens’ value based on the increased value of the assets that back the token.
Again, hopefully this makes sense; it’s not the easiest concept to attempt to explain, since the human brain will always try to form a logical understanding; and is very reluctant to accept a paradox as fact.