The Stellar Development Foundation (SDF) announces a token burn of more than 50% of its total supply. The decision was made to improve the efficiency of the development of the token.
The price of XLM gained over 20% following the announcement. Decreasing the supply has a positive effect on the crypto token, but not up to expectations.
Ideally, to maintain the market capitalization, the total price should have doubled. Nic Carter, founder of Adamant Capital and Coinmetrics noted,
I’ll be the one to point out that the fact that XLM is only up 20% on the news (instead of 100%) that 50% of supply is being burned is solid evidence against the “burns are deflationary” thesis
This is the second change announced on Stellar supply metrics. Recently, it also decided to burn the coin fees in the future, eliminating the 1% annual inflation.
Why was the price reaction so Dull?
There is more to it than meets the eye. The coin burn does not affect the circulating supply of the cryptocurrency. Hence, the actual holdings of investors at the moment remains the same. SDF held the quantity that has been burnt from the supply. While the exact amount decreased from about 105 billion to 55 billion, the circulating supply remains at 20 billion XLM.
Furthermore, decreasing the total supply would not effectively decrease the market capitalization by 50%. Accounting for the 20% increase, the market capitalization till stands to lose about 40% from its total book value.
(The total market cap of 1.6 billion is based on the circulation supply only)
According to the new mandate, the total supply of XLM with the foundation will be about 30 billion. This is still greater than 50% of the total supply. The foundation noted in the blog post,
We view these as “Stellar’s lumens”, not so much owned by the Foundation as held by us temporarily to use for initiatives that support Stellar and the ecosystem.
While the investors welcome the decision to burn the supply, it raises concern on the decentralization of the crypto. Hypothetically, in the future, they can also choose to increase the supply; this would have a negative effect on price.
Nevertheless, SDF stretches to increase its brand value by this strategic move. Effectively, the $4.4 billion burnt was held with SDF. Now, the organization aims to undertake new strategic plans for the development and growth of the Stellar ecosystem.
Do you think the organization made the right call? Please share your views with us.
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Nivesh from Engineering Background is a full-time Crypto Analyst at Coingape. He is an atheist who believes in love and cultural diversity. He believes that Cryptocurrency is a necessity to deter corruption. He holds small amounts of cryptocurrencies. Faith and fear are two sides of the same coin. Follow him on Twitter at @nivishoes or mail him at nivesh(at)coingape.com