Suggested Accompanied Listening

John Coltrane’s A Love Supreme Part I: Acknowledgment (on repeat)

Key Terms

tokenomics, token burning, consensus, governance, eater address, token signatures, seigniorage shares

Table of Contents

• Introduction

• What is mechanism design?

• How does a burning mechanism work, generally?

  • Burning: after a token offering

  • Burning: to create a deflationary token supply

  • The role of the eater address for token burning

• Other token burning examples

  • For stablecoins: burning for supply control

  • For miners: proof-of-burn consensus algorithms

• Data visual: price impact when a project burns its tokens

• What is Black Wall Street?

  • Background

  • White mob burning mechanism

  • If Black Wall Street had never been burned down

    • Wealth projections

    • Visualization

• Solutions

  • NFTs for real-world asset tokenization, immutability & insurance

  • Decentralized value storage

  • DAO infrastructure – shared values, value creation & a decentralized silo

  • Bitcoin: the most secure network around

• Conclusion

Introduction

When pursuing the design of a blockchain network, perhaps the most important component to consider is tokenomics, a word which combines the two words “token” and “economy,” and which refers to the design of economic systems built with blockchain technology.

From governance to monetary policy, from incentivization to transaction validation, and beyond; tokenomics involves the analysis and/or design of a network – coupled with its native token(s) – and how the overall approach aligns the various objectives established for the network.

In this post, we place special emphasis on the burning mechanism, a popular method applied within blockchain-based ecosystems, to pursue goals such as coin supply control, token value increase, and more; as well as draw comparisons between the usage of burning mechanisms inside of blockchain networks and the burning of Black Wall Street in Tulsa, Oklahoma in 1921, where a prosperous African-American community was destroyed by a white mob.

What is mechanism design?

Before diving into burning mechanisms, it is beneficial to establish a working definition for mechanism design itself. According to Investopedia, mechanism design theory is defined as “an economic framework for understanding how businesses can achieve optimal outcomes when individual self-interest and incomplete information may get in the way.” It’s established from game theory, focused on aligning incentives with motivations, so as to achieve the overarching goals of an organization or network.

Cryptoeconomics is a term which describes the combination of cryptography and economic incentives for the design of decentralized web applications. Bitcoin has gained global recognition and achieved its success for many reasons, but it’s arguably the crypto-economic incentives – which includes mechanism design – which has enabled the Bitcoin network to meet its current success and leadership within the cryptocurrency market and decentralized economy.

What’s more, although one is not constrained to incorporate cryptography when approaching mechanism design, it is highly recommended to do so when developing decentralized web applications. We do not presume to be experts on mechanism design, cryptoeconomics or tokenomics, and while a deep dive into mechanism design is beyond the scope of this paper, this post here is a very solid place to start.

Beyond decentralized web applications, we also believe mechanism design is useful for individuals as well, and empowering individuals to become their own lifestyle and mechanism designers is at the heart of the RNWD mission.

How can a burning mechanism work within crypto?

Burning: after a token offering

In general, a burning mechanism within a blockchain network involves the reduction of a digital token’s supply. If a project, for example, decides to issue 10,000,000 tokens during a public sale, and commits to “burning” any unsold tokens, then if 4,000,000 tokens are sold during the public sale, then the remaining 6,000,000 would be “burned.” This means that these 6,000,000 tokens would no longer “exist” within the network, instead being sent to a receive-only wallet address that is unable to transfer those tokens due to there not being a private key associated with the wallet address. This, in effect, “burns” the tokens, as they can no longer be moved.

This can be perceived by (potential) token holders as a healthy implementation for a project’s token supply, particularly if there exists some solid form of utility to the token, even better if this utility is long-term. However, burning tokens may not always be well-received or well-done.

Burning: to create a deflationary token supply

In another example, we can look at the recent implementation of the EIP-1559 proposal for Ethereum, which changes the network’s fee market, or gas, mechanism as well as its monetary policy in general. Prior to EIP-1559, the Ethereum gas fees were fully provided to network miners. Under the new implementation of EIP-1559, a base fee for processing transactions is established, but in addition, users can offer a “tip” to miners to incentivize the miners to choose to process their transaction. The tip – as well as the block reward – goes to the miners, while the base fee is burned.

The idea is that as the number of transactions increase, the more there will be deflationary pressure on the supply of ETH.

Essentially, owners, developers or participants within a network leverage a burning mechanism to reduce a token’s supply in order to achieve certain goals.

The role of the eater address for token burning

One of the key components to successfully implementing a burning mechanism is the unique functionality of the wallet address that receives the tokens set aside for burning.

Normally, a crypto wallet address comes with a public key and a private key. But, when the desire is to burn one or more tokens, an eater address is used, and this type of wallet address, although publicly viewable, has no private key. With respect to all of the tokens queued for burning, their signatures are placed into this irretrievable wallet, and their status as “burned” are broadcast to the blockchain.

The coins are not physically destroyed when burned, but they are rendered completely useless after undergoing this process.

Other examples of token burning mechanisms

Tokens can be burned at various frequencies and for various reasons. In the case of stablecoins, token burning can occur in an effort to control the token supply, which can aid in the stablecoin maintaining its peg to a particular currency. In the case of proof-of-burn consensus algorithms, token burning can reflect the economic desires of miners, help prevent fraudulent activity within a network, and beyond.

Burning: for stablecoin supply control

As it’s been demonstrated in the various examples discussed above, token burning can be built into the code of a project, agreed upon for implementation via vote, or even during a token sale to reduce token supply by the number of tokens left unsold.

In the case of stablecoins, token burning is performed to maintain the price peg of the coin, where the stablecoin could be directly pegged to a fiat currency like the US dollar, a commodity like gold, or even other cryptocurrencies. The objective in this case is to encourage market activity to move towards the desired stable price. 

Collateralized stablecoins are the most prevalent.

In June 2020, it was revealed that up until that point in the year, there had been nearly 5,600 stablecoin burning events, with the total value of “destruction” north of $3 Billion.

But, in what context does stablecoin burning occur?

Essentially, wen a stablecoin holder decides to liquidate, the parties that manage the stablecoin will take out the equivalent amount of the stablecoin from its reserves. The corresponding stablecoins are then “burned” and thus no longer in circulation. The mint-burn back-and-forth occurs in accordance with market demand (minting being the creation of stablecoins when someone chooses to buy).

A burning mechanism within an algorithmic stablecoin network can serve a different purpose, however. Whereas the Bitcoin network supply of BTC is governed by simple, deterministic rules which have been specified in advance, and is not influenced by facts outside of the system, a central bank pursues a “stochastic Dollar inflation via appropriate Dollar injections,” thus one of the major differences between a currency like BTC and a fiat (or furthermore, a stablecoin) currency is that the price is not stabilized by any institution, but yet – up until today – succeeds as a credible medium of exchange (referring to Bitcoin). Stablecoins can serve as a credible medium of exchange as well, but algorithmic stablecoins often are designed according to a model referred to as seigniorage shares, which involves replicating this same stochastic process implemented by a central bank as well as collateralized stablecoins.

Essentially, stablecoins are more centrally influenced than not, with algorithmic and/or decentralized stablecoins seeking to differentiate from a collateralized stablecoin by being influenced in a more decentralized manner.

For some, any form of manipulation – centralized or otherwise – of a currency is viewed as dangerous and unreliable as a monetary policy. Some would look to the recent happenings with Terra’s UST as an important example to review. The project had a token burning event as well.

Proof-of-burn consensus algorithm

Is it wise to give up short-term wealth for lifetime access to wealth creation? This is what a proof-of-burn consensus algorithm can offer aspiring miners.

The concept was first introduced by Iain Stewart in 2012. His goal: to be able to destroy a cryptocurrency “irrevocably and provably.”

In this paper, authors Kostis Karantias, Aggelos Kiayias, and Dionysis Zindros introduced the first cryptographic definition of what a proof-of-burn protocol is. They proposed the following properties for burn protocols: unspendability, binding, and uncensorability.

In the case of unspendability, the goal is to verify that the address cannot be used for spending. The role of binding is to associate metadata with a specific burn. With respect to uncensorability, there mustn't be a distinction between a burn address and a regular address.

But how does this relate to miner wealth creation?

Consider that the process for mechanism design essentially begins with the end in mind, that is, with first defining the desired network outcomes and then working backwards to create a game of sorts where the various participants are incentivized to take certain actions.

For miners within a network, a proof-of-burn consensus algorithm can consist of an (aspiring) miner’s requirement to burn a set number of their own tokens in order to gain the ability to perform mining within the network over the lifetime of the network’s existence. The more a miner burns their network tokens, the more ability the same miner receives to mine tokens within the same network, as an example.

A proof-of-burn consensus algorithm can be used to verifiably prove that the miner has indeed “burned” his her crypto asset, while also (theoretically) supporting the long-term tokenomics health of the network. The miners burn their own tokens to gain access to opportunity, and this opportunity helps to power the network itself. There is an incentivization alignment.

Data analysis: price impact when token burning occurs

Let’s take a look at the adjusted closing price of Ethereum, around the time of the implementation of EIP-1559 on August 5th, 2021, which changed details regarding the network’s fee mechanism. The proposal established a new fee structure by which all base transaction fees would be burned, while also enabling miners to receive a “tip” on top of the base transaction fee. This change in Ethereum’s network essentially changed ETH from inflationary to deflationary. This was largely well-received, even by more traditional investors.

It should be noted that this wasn’t a token burning event, but rather, the implementation of a burning mechanism applicable to all ETH transactions moving forward.

What we can see here is upward movement in the price of ETH, even extending to the end of the month. Whether this price movement is solely – or mostly – attributable to the implementation of EIP-1559 is perhaps uncertain, but one could speculate as such.

In the case of Stellar Lumens, a singular token burning event took place. The Stellar Lumen team reduced their token supply from 105 billion tokens to 50 billion tokens on November 5th, 2019. Essentially, Stellar Lumens destroyed – or burned – 55 billion tokens in a singular event. Here is a look at the price of XLM from just before the burning event until the end of the month:

Here, we see an initial spike in the price of XLM (actually a sharp increase in the first hour after the burning of 55 billion XLM tokens), but then actually a steady decrease in price up until the end of the month. The Stellar Lumens team did not conduct the token burn to increase its price, but rather to adjust its token supply to a level they felt was appropriate given project needs, however, understanding the nature of crypto token burning events and what many projects hope to achieve (i.e. creating a more valuable token supply), it is interesting at the very least to observe an overall price decrease for XLM after its token supply was decreased via burning.

What is Black Wall Street?

(there was an attempt to put a ‘was’ where the ‘is’ is in the above)

Black Wall Street refers to the prosperous African-American Greenwood community in Tulsa, Oklahoma. O.W. Gurley is credited as one the founders of Greenwood, along with Edward P. McCabe, an African-American politician, attorney and land agent. Gurley was an educator and entrepreneur who made his wealth as a landowner. Around 1906, Gurley moved to Tulsa and purchased 40 acres of land, with the intention that the land was “only to be sold to colored.”

Greenwood became a literal refuge for black folx in short order, especially for those “migrating from the harsh oppression of the Mississippi.”

The name Greenwood itself is derived from a city in Mississippi.

It wasn’t just the intentions of Gurley that made Greenwood an all-black community, though. There were also segregation laws that “established” Greenwood district lines.

Greenwood was (is?) “little Africa,” or “nigger town,” to the majority of white folks.

But, despite this, Greenwood became a thriving hub for African-Americans. According to Greenwood Cultural Center, “the 35-block Greenwood District surrounding the corner of Greenwood Avenue and Archer Street became a prosperous center for black commerce in the early 1900s…a hotbed for jazz and blues, and the site where Count Basie first encountered big-band jazz. Greenwood District was “the richest African-American neighborhood in North America.”

Moreover, the financial circulation was such that money would circulate within Greenwood for approximately 19 months before being spent elsewhere.

In Greenwood, six African-Americans had their own airplanes, while the state of Oklahoma only had two airports. Gurley himself built five residences, three two-story buildings, as well as bought an 80-acre farm in Rogers County.

The burning mechanism of a white mob

There are many solid reports to date on what went down just before the white mob’s burning mechanism was implemented.

The focus of this piece is the white mob burning mechanism itself and its comparison to crypto burning mechanisms, but it is highly recommended to review the events leading up to the white mob’s temporary attempted destruction of Greenwood.

In this piece, Carlos Moreno, the co-captain for Code For Tulsa, writes:

“…over the course of 48 hours in May of 1921, a group deputized by the Tulsa Police Department and working in coordination with the Oklahoma National Guard interned an estimated 6,000 people in three camps, looted and burned 35 city blocks to the ground, and murdered approximately 300 of the neighborhood’s residents. This is the most deadly instance of racial violence to take place in US history (second only to the 1919 Elaine massacre in Arkansas). New evidence suggests that the attack on Greenwood was motivated by a greed for land, and not—as previously theorized—sparked by an encounter between a Black man and a white woman, or a simple act of mob violence.”

But also, in an interview with NPR, Hannibal Johnson, author of the book Black Wall Street: From Riot to Renaissance in Tulsa’s Historic Greenwood District, we find this exchange between Johnson and interviewer Amy Goodman:

AMY GOODMAN:* But, Hannibal Johnson, before you move forward, explain what happened. The U.S. Army bombed this area called Black Wall Street?*

HANNIBAL JOHNSON:* Well, according to the most authoritative source on the bombing issue, the question is still an open question. There are eyewitnesses who say the area was bombed with kerosene and/or nitroglycerin bombs that caused the fires to rage more broadly. The official version is that there were, in fact, private planes that flew over the Greenwood community and that they were on reconnaissance missions, they were surveying the area to see what happened. *

So, the question is: Whom do you believe?

AMY GOODMAN:* And it was called Black Wall Street because?*

HANNIBAL JOHNSON:* Black Wall Street really is a reference to the proliferation of black entrepreneurs that thrived in early Greenwood, and actually thrived even after the riot, because what’s remarkable is the people of Greenwood who rebuilt the community in the face of seemingly insurmountable odds after the utter devastation of the 1921 Tulsa race riot.*

Remembering some of the main crypto-centered contexts in which token burning takes place – after a token offering, to program a deflationary token supply, to control stablecoin supply – we discover perhaps a common thread: a goal to protect (or increase) value for all token holders. 

How does this compare with the burning white mob’s burning mechanism activated within the thriving, all-black Greenwood community?

For one, within a cryptocurrency network’s burning mechanism tokens are mostly designed in a fungible fashion, meaning that one of the network’s tokens can be exchanged for another token within the network, and all tokens within the network are of equal value (assuming there are not multiple tokens within the network, of course). Fungibility is also critical, for example, to preserving network privacy and censorship-resistance, as is the case with the Bitcoin network. This has the most relevance, perhaps, with respect to the theoretical value in implementing a token burn within a cryptocurrency network.

On top of a fungible nature of a token’s supply, by burning some of a network’s tokens which are not held by holders, all holders of the token stand to have the value of their tokens protected or increased, in theory. Simply put, a burning mechanism is normally not targeted at holders’ tokens, but rather tokens which otherwise exist within the token supply, and which, if burned, decrease overall token supply, leading to some type of theoretical benefit to all token holders.

In the case of miners burning their own tokens so as to gain mining rights, this is done to gain access to further financial opportunity, and it is done voluntarily, and furthermore, to protect the other token holders within the network, by aligning the incentives of miners with others in the network.

In the case of the burning white mob mechanism, it destroyed approximately 35 acres within arguably the wealthiest, self-sustaining African-American community of its time. The owners of property within Greenwood, naturally, did not voluntarily elect to have their assets burned. What’s more, legal segregation alone prevented African Americans from being able to exchange their asset in Greenwood for an equal asset in majority-white areas of Tulsa (even as this was the case then in Greenwood, evidence suggests that, in fact, race determines home values today more than it did in 1980, revealing home prices in white neighborhoods increase by more than $200,000 more than those in black neighborhoods — of course this is assuming similarity in type, upgrades, and more to a property; these would be comparable properties).

One could say that, essentially, the burning white mob mechanism sent the self-generated, by-the-pulling-up-of-their-own-bootstraps wealth of Greenwood to an eater address of sorts, and though reparations were promised, they have yet to be provided.

Greenwood’s destroyed wealth is seemingly still being held inside of the eater address.

A further analysis reveals another notable observation: the comparison of the consensus required for crypto network burning mechanisms to be implemented versus the consensus required to activate the white mob burning mechanism.

Unless a cryptocurrency network’s founding team has designed it otherwise, burning mechanisms are implemented only after consensus has been reached among token holders with governance rights or the burning mechanism has been written into the code. The rise of decentralized autonomous organizations (DAOs) are often used to facilitate governance coordination. In this way, all token holders who have some value at stake are normally able to cast their vote in favor or against the implementation of a burning mechanism, in proportion to how much governance power they have, usually conferred by how much value one has within the network (i.e. number of tokens in proportion to the token supply amount).

Unfortunately, there was no governance or regulations in place to protect Greenwood residents from a disadvantageous burning.

And so what we are perhaps left with is this: the white mob burning mechanism was (is?), somehow, written into the code of Tulsa, Oklahoma.

At the very least, this all helps to reveal just how unaligned the impact on value was (is?) of the Greenwood community and the white mob. 

When the white mob looked upon the value created by Greenwood they did not see a collective, ecosystem-wide, nationwide store of value inclusive of themselves. Instead, they saw…[email us at contributors@rnwd.xyz if you’d like to finish this sentence and have a chance to be listed as a contributor to this piece]

Essentially, these were two completely different networks, in practice, with one network having governance power over the other.

Members of the white mob were deputized on the very night Greenwood was destroyed. No members of the white mob were charged with any crimes afterward. O.W. Gurley himself had been appointed an officer by the time of Greenwood’s temporary destruction, however this did not prevent his assets from being destroyed as well. From his own accounts, the first terrorist attack on US soil led to his losing around $200,000 USD worth of property.

Reports show a significant presence of the Ku Klux Klan in Tulsa, Oklahoma in 1921 as well, but there is a good chance you probably already guessed that. Nevertheless, given that token burning mechanisms are often implemented to protect or increase the value of token holders, it could be argued that there’s no official way to prove that the white mob received some benefit from the destruction of Greenwood, for although the burning event clearly destroyed value for Greenwood residents, there was no alignment of incentives officially established.

However, Dr. Claud Anderson — author of Black Labor, White Wealth; Powernomics; and numerous other titles; and the most important voice in the United States of America when it comes to black economic empowerment — is famous for presenting the fact that black folx currently own ½ of 1% of wealth in the United States, and that this wealth ownership level is the same as it was on the day black folx were “freed” from slavery.

Perhaps, even without being conscious of it, the white mob burning mechanism worked to protect — and perhaps even increase — the value of white value capture across the United States, most certainly in Tulsa, Oklahoma.

What might Greenwood have become if it were never temporarily — and most horribly — destroyed? 

What if Tulsa’s Black Wall Street had never been burned down?

Questions & Actions

1. What role does governance play in the implementation of burning mechanisms in blockchain networks? What role did governance play with respect to the burning of Black Wall Street in Tulsa, Oklahoma?

2. What’s the difference between a proof-of-burn consensus algorithm and a project’s decision to “destroy” tokens?

3. Identify 3 things in your possession whereby your overall quality of life would be improved if those things were burned.

4. Determine how to leverage blockchain technology to store (a portion of) your value in such a way that your value is better protected by more decentralized methods. 

5. DYOR on Bitcoin, especially on its crypto-economic design. The Bitcoin whitepaper is a great starting point.

DISCLAIMER

Disclaimer: The purpose of this post is to share general information only. It does not constitute advice for investment or recommendation to buy or sell any investment and should not be used to evaluate the merits of carrying out an investment decision. Furthermore, this post should not be relied upon for legal or tax advice, or investment recommendations. This post reflects the opinions of the author(s), as of today. In addition, none of the information herein is to be considered the official opinion of the author, as the opinions reflected herein are subject to change without being updated.