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Does Stellar’s 55bn token burn disprove the deflationary thesis?

Token burning is generally considered an effective practice for restricting supply and increasing value. So, what happened with the Stellar (XLM) token burn?

Yesterday, Stellar Lumens carried out a massive and unexpected XLM token burn.

According to the Stellar Development Foundation, “a diverse family of entrepreneurs, developers, innovators, thinkers, and builders” gathered in Mexico City and apparently decided there were too many XLM tokens in circulation.

So, they went ahead and burned 55 billion. What happened next?

The need for a 55bn Stellar token burn

The general thesis circulating the cryptocurrency community is that token burns are enormously effective at increasing value. They restrict the supply of the altcoin in question which then positively impacts its price due to the basic laws of supply and demand.

According to the foundation’s blog post, its community collectively decided:

“In time and after a lot of thought, we’ve come to realise they’re [the allocations of XML] too large. SDF [Stellar Development Foundation] can be leaner and do the work it was created to do using fewer Lumens… So: we’ve decided to reduce our Lumen allocations.”

The foundation believes that this massive burning of more than 50% of the total token supply of XML will make the Stellar ecosystem more efficient:

“It’s an acknowledgement that we owe it to the ecosystem, to the network, and to ourselves, to be as efficient as possible in our work.”

The post details Stellar’s plans for the allocation of the remaining XLM tokens. These include investing in further use cases, marketing support, development, and rolling out new products.

While clearly steering away from the impact the foundation believes the burning will have on the token value, they affirmed their belief that:

“Those 55.5 billion Lumens weren’t going to increase the adoption of Stellar.”

And used language like:

“We’re excited to enter this new phase of Stellar’s growth, and we’re excited to have you along with us.”

Was that an indication that the foundation expected a positive market reaction? Key market analyst Mati Greenspan clearly believed the Stellar token burn would send its price into the stratosphere, enthusiastically tweeting:

While the price of XML rallied by a respectable 20%, at the time of press today, that has now dropped to around 14%.

The 55bn Stellar token burn failed to move the crowds

Vocal Bitcoin maximalist, partner at Castle Island Ventures, and co-founder of Coinmetrics.io Nic Carter was quick to point out the disappointing XML surge. He said this was “solid evidence” against the “burns are deflationary” thesis.

He went on to point out that unlike Bitcoin, Stellar Lumens is centralised, and the wider community had no say in the token burn.

“On the one hand they burned the Lumens; on the other hand a single entity had unilateral discretion over >50% of supply.”

He also added:

“Let this be a reminder of how capricious these permissioned systems are. There’s just no predictability.”

His comment sparked a debate on Twitter, with many key people in the space – including Elizabeth Stark of the Lightning Network – joining in to make fun of the valuation that one journalist at The Block had given the tokens ($4.4 billion).

Another follower went so far as to call the Stellar token burn a “stunt”. He replied to Nic Carter:

“And burning HALF the supply of tokens and going from $.07 to $.08 does not seem to be a proportionate mechanism by any means to the point of being nothing more than a short-term stunt…”

However, another still argued that the lack of a massive surge wasn’t clear-cut evidence that token burns are redundant:

“You can say it’s evidence of it not being 100% deflationary, but you can’t say it’s totally not deflationary (yet). It’s up 20%.”

This left Nic Carter to conclude that it wasn’t perfect evidence that token burns equal deflationary currencies, however:

“I do think the narrative on burns is overdone.”

It will be interesting to watch the XML token over the coming months to really get an insight into whether the Stellar token burn gamble paid off.

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