Risk versus Reward for the two sides on LSK tokens

[AyaHQ_Michael]

Creating an Ecosystem Fund vs. Burning Tokens: A Balanced Approach

In the cryptocurrency world, maintaining the value of a token while fostering growth is a delicate balancing act. Two popular strategies often emerge in these discussions: creating an ecosystem fund and burning tokens. While both have their merits, they represent fundamentally different approaches to the long-term health of a cryptocurrency project. This article explores the benefits of each, balancing the trade-offs to help communities and project leaders decide what’s best for their token’s future.

1. The Case for Creating an Ecosystem Fund

An ecosystem fund is a pool of resources, typically consisting of tokens set aside to promote the growth of a project’s infrastructure, community, and overall adoption. This fund can be allocated toward various initiatives, such as:

• Developer incentives: Funding new apps, smart contracts, or other innovative uses for the token.
• Marketing and partnerships: Attracting businesses, platforms, or influencers to integrate or promote the project.
• Community-building: Supporting users, organizers, and content creators who advocate for the token.

Long-Term Benefits of an Ecosystem Fund

1. Fostering Innovation and Growth: By investing in developers and projects building on top of the platform, an ecosystem fund ensures a steady stream of innovation. This can increase the overall utility of the token, making it more attractive to users and investors alike.
2. Building a Loyal Community: Projects with active communities have a better chance of long-term survival. An ecosystem fund can nurture a loyal following by offering rewards, organizing events, and helping content creators spread awareness.
3. Ensuring Long-Term Sustainability: With funds available to drive marketing, partnerships, and product development, a cryptocurrency project is more likely to stay relevant in an ever-evolving space. Tokens set aside for this purpose act as a form of “venture capital” for the ecosystem’s growth.
4. Incentivizing Adoption: When the project can afford to incentivize early adopters or major partners, it creates a network effect that may lead to rapid adoption. As more users join the platform, the token demand rises, leading to long-term price appreciation.

Challenges of an Ecosystem Fund

• Dilution of Value: Critics argue that setting aside tokens for ecosystem development can dilute the circulating supply, especially if the tokens are released too quickly. This could exert downward pressure on the price in the short term.
• Centralized Control: Ecosystem funds are often controlled by a small group of developers or the founding team, leading to concerns about centralization. Mismanagement of these funds could damage trust in the project.

2. The Case for Burning Tokens

Token burning refers to permanently removing a portion of a cryptocurrency’s supply from circulation. This is typically done by sending tokens to an irrecoverable address, effectively reducing the total supply.

Long-Term Benefits of Token Burning

1. Scarcity and Value Appreciation: A fundamental economic principle is that reducing supply, while demand remains constant or increases, will lead to price appreciation. Burning tokens can make the remaining tokens more valuable, rewarding holders for their long-term commitment.
2. Signaling Strong Commitment: Token burning is often viewed as a signal of confidence by the project’s founders. By reducing the total supply, the team shows that they are willing to forego potential future profits to enhance the token’s long-term value.
3. Deflationary Mechanism: In some projects, regular token burns can introduce a deflationary effect. This means the value of the token is more likely to increase over time, encouraging holders to hold on to their tokens rather than selling, further stabilizing the market price.
4. Immediate Market Impact: Unlike an ecosystem fund, where the benefits may take time to materialize, token burns have an immediate impact on supply. This can create a sense of urgency among investors and traders, boosting demand as the supply diminishes.

Challenges of Token Burning

• Missed Growth Opportunities: While burning tokens creates scarcity, it does not directly contribute to growth. Tokens that are burned could have been used to fund development, marketing, or partnerships—activities that could increase long-term demand for the token.
• Limited Long-Term Sustainability: If the project’s utility and adoption do not grow alongside the deflationary effects of burning, the long-term sustainability may be in question. Token burning alone does not solve underlying issues of utility, innovation, or user engagement.
• Perception of Short-Termism: Burning tokens may be viewed by some as a short-term fix to prop up the token’s price without addressing deeper issues. Projects that rely too heavily on burning could face criticism for focusing on short-term gains at the expense of long-term growth.

3. Finding a Balanced Approach

Ultimately, the decision between creating an ecosystem fund or burning tokens depends on the project’s goals, maturity, and vision for the future. For newer projects, the priority might be building out the ecosystem, fostering innovation, and growing the user base, making an ecosystem fund more attractive. For more mature projects with an established user base, burning tokens could be a strategic way to reward holders and signal confidence in the project’s longevity.

Synergy Between Both Strategies

Interestingly, some projects employ both strategies in tandem. By using part of their supply for an ecosystem fund to fuel growth and innovation, they ensure continuous development. Meanwhile, periodic token burns help control supply and reward holders. This hybrid approach can help balance short-term value appreciation with long-term sustainability.

For example, a project could allocate 10% of its token supply to ecosystem development and reserve another 5% for periodic burns as milestones are achieved. This approach allows the project to invest in its future while keeping investors confident that supply-side pressures will be mitigated.

4. Conclusion

In the long run, both ecosystem funds and token burning strategies can be beneficial, but their success depends largely on timing and execution. Ecosystem funds ensure steady development, adoption, and community engagement, fueling growth and innovation over time. On the other hand, token burning enhances scarcity and can drive immediate value appreciation, rewarding long-term holders.

A thoughtful combination of both strategies may offer the most balanced path forward. By investing in the project’s future while maintaining a deflationary mechanism, token-based ecosystems can achieve sustainable growth while ensuring long-term value for holders. As always, the specifics of each project should guide the ultimate decision, but a hybrid approach could provide the best of both worlds.

[grumlin]

Why do you create a new topic when you have already created almost the same one?

[Filmmaniak]

Let me repeat myself again. Lsk token price is dropping for years. We have airdrops, nft rewards, staking, minting etc. and we don’t have any burn. This is very unbalanced leading to low token price and lack of positive sentiment. Investors don’t want to invest. Only full 100m token burn is the best for lsk. Team lsk have funds for growth and development of the project already this is why token burn won’t affect technology development potential. Even if token burn turn out to be short-term event it will be beneficial for everybody. Not only it will rise the price but also will attract many new investors but also developers and project contributors leading to faster adoption. Even for long term holders of lsk it will mean that price won’t be lower than that of current low price zones. Burning is increasing token price by 25% permamently not taking into account new investors and with more optimistic sentiment it is very likely to increase by 50% or more and stay in that price. You are talking about balance (using chatGPT instead of your own thoughts) and in order to balance this project we need burning.

[Kudibos]

@Filmmaniak
Quick question, are you a token holder or you are building tangible products on Lisk technology to be potentially used by humans now or in the future?
If you are a holder, then I sincerely appreciate your concerns about the tokens. But if you are a builder who truly believes in the technology, I can bet my last molecule of blood that, you will have a long-term view of the ecosystem growth to increase all stakeholder’s value. Let’s take, for example, Ethereum which has no limit in supply yet has had significant growth in its asset price. It happens because everybody including Lisk is building on top of the tech stack, by doing so, the token is needed to pay for gas fees. So just imagine for a second, that Lisk technology as an L2 becomes so attractive for builders in the frontier markets, and we have enough top-quality products built on top of Lisk, what do you sincerely think would happen to the overall token value?
We can not import everything in the current capitalist model into a new world of decentralization by just a name. We need to have patience, a long-term approach, and a very strong conviction to truly get billions to believe in this tech we all find ourselves in.
I am a builder, I build for the long term and am driven by conviction and resilience.

[Jujuboy]

As a builder, what’s there to loose really, if price goes up or down, you’d really not care. but in crypto, a project is made by by investors as much as it is by builders and users.

Don’t forget, the funds you want to allocate to the ecosystem was raised by investors, not builders. So it’s not out of place for long term holders to demand to make $lsk scarce through burning.

With that said, I am of the view that burning won’t rob the ecosystem of the necessary funds to keep developing. Our tokenomics already increased supply to cater for this.
I’d vote to burn, the price action that would follow would gather enough attention for builders across the EVM to finally notice lisk.

Wherever the pump goes, crypto users go. And wherever that volume goes, builders will follow.

[UZAMARU]

According to the latest Gartner Hype Cycle, blockchain has entered the enlightenment phase, where technologies and trends are maturing, and the benefits of innovation are becoming evident. This phase will see many early adopters entering the space.

The adopters entering now will prioritize benefits such as product safety and trust, usability, and low costs. For many years, Lisk has been experimenting to lower the barriers to blockchain adoption, and I am confident that this experience will be valuable moving forward.

In light of this, it is natural to think that the market, which has previously been driven by investor expectations leading to price increases, will gradually shift toward a model where increased product adoption attracts investors and subsequently drives up prices. This is also consistent with historical trends from a long-term perspective. Ignoring this economic principle, schemes that artificially inflate prices through large-scale token burns could lead to negative perceptions, resulting in prices not rising as expected, and potentially driving users away due to disappointment.

If I had to choose between two options at this point, I would support a sustainable “allocation.” However, I am not entirely against all forms of burning. As mentioned by przemer, if we can allocate a portion of sequencer revenue or other fees to a DAO fund, we could implement gradual burns while ensuring a sustainable DAO that will support the ecosystem for many years to come. This way, we can execute burns while maintaining a positive market sentiment.

First and foremost, we should focus on attracting more users to the Lisk ecosystem rather than artificial methods to raise prices. The hybrid approach mentioned in the agenda could be an effective means to achieve this. The community is at a point where it should explore new options.

[Filmmaniak]

Take into consideration that lisk have a great competition and many newer projects are rising. You can’t compare current situation to situation from the past because you will be very wrong. Ethereum for example had not as much competition back in the days and thanks to it’s deflationary nature it succeed to be number one altcoin. We can’t just rely on “balanced” approach because it’s not what investors will be interested in. People will invest their money and will be building on projects which have “strong” events. For lisk only strong event for now is 100m token burn. Without it you can develop the best ever ddapps etc. but nobody will care and hear about it. Lisk proved to be one of the worst in terms of promoting itself. If you follow balanced approach lisk will go unnoticed and people will be working on and using worse technologies because their creators knew how to make fomo. Lisk never knew how to and never will. That’s why token burn is the opportunity to drag new creators and investors to the project. It just have no disadvantages. In this case truly it should be rapid 100m token burn or this project will never become greater than pepe memecoin which is tragic. 100m token burn equal permament price +25%. If you are afraid that people will sell after burning that means you’re not believing that lsk is a good product. If it is not good product it means new projects replaced it and there is no longer need for lisk if for example all will start building on arbitrum. How many years lsk is running and how many ddapps running on lisk by now?