I had again a question this week about why we burn tokens with CTPSB and it seems that the explanations so far are not sufficient. So I will try to explain it as precisely as I can.
To understand how the burning mechanism that was introduced is pushing up the apr, we need to get how the token value is determined.
The value of one CTPSB token is defined by the following calculation:
- Value CTPSB = Hive Power on @ctpsb / CTPSB tokens in circulation
Keep in mind that whenever the @ctpsb account needs to power down, the according number of tokens would be burned. If new tokens are minted, the according number of hive power is powered up. So power downs or power ups have no influence on the value of CTPSB.
How does the token value evolve?
The value of CTPSB is evolving thanks to the increase of Hive Power generated with curation rewards, author rewards, staking rewards and also some minor other incomes on the second layer.
The growth is mainly defined by curation rewards which are directly indexed to the existing hive power.
Let's build a little example that has no direct relation with reality:
Let's say there are around 30'000 Hive Power on the account and they generate around 10% return per year. This represents a weekly increase of about 57 Hive.
What happens when tokens are burnt?
When CTPSB tokens are burnt this has no influence on the hive power or the return of the account. With the above example, we would still have 30'000 Hive Power and a weekly return of 57 Hive.
However, the difference is on the denominator side:
In our example there are 30'000 Hive Power and 10'000 tokens in circulation. This means that each token in our example would be worth 3 Hive.
If we burn tokens however, we directly influence the value of the token. Let's say we burn 3 tokens. Then the value would be 30'000 divided by 9997 = 3.001 Hive
So burning has an impact on the value but it's not only that, the burning has also an influence on the return of the token.
Since the hive power doesn't change, it grows at the same speed. When we burn tokens however, The growth that is generated is distributed to a smaller number of tokens.
Before burning, 57 Hive are distributed to 10'000 tokens every week. After burning, 57 Hive are distributed to 9997 tokens. This means that thanks to burning each token gets a bigger part of the pot and therefore grows a bit faster.
Cumulated effects
The more tokens the project manages to burn, the stronger the effect will be felt. Just to make an example again. If you have 30'000 HP and you have 2 tokens. If you burn one, the remaining token will double in value (from 15'000 to 30'000). If you have 30'000 HP and you have 10 tokens. By burning one token, you would pass from a value of 3000 to a value of 3'333. This is just to illustrate how the effect of burning is high the smaller the number of tokens in circulation is.
Therefore with every burnt token, we add some more value to all the existing tokens. It also allows to increase the return of each token and finally the effect will be felt more and more, the bigger the quantity of burnt tokens is.
The numbers of this week
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