How burn functions impact price

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Go troll yourself

Imagine you’re a DAO. Just chugging along and continuing to grow using open-source technology. All of a sudden, you’re slapped with a patent infringement lawsuit.

That’s what happened to DAI issuer MakerDAO (and Compound Labs, though the suit initially targeted Compound Protocol) two years ago. The pair had been locked in linked, but separate, legal battles with True Return Systems and its founder-slash-patent owner Jack Fonss.

The patent in question was approved by the US Patent and Trademark Office in 2018. It, according to its patent page, is a “system, method and computer readable storage medium for storing, creating, monitoring, managing, and modifying measurement, descriptive differences and parameters of the records of distributed computerized ledgers works through a separation and linkage of stacked modular data storage and processing.”

Fonss and TRS claimed that the patent covered systems linking offchain data to a blockchain.

The patent wording itself is admittedly vague, something that the DeFi Education Fund was quick to point out when it filed an Inter Partes Review challenge with the USPTO.

For a series of reasons (including the fact that Fonss died before any of the legal action could be cleaned up), the IPR and the lawsuits were still ongoing until earlier this month, when DEF announced that it had reached an agreement to buy the patent from TRS.

DEF will dedicate the patent to the public and the two lawsuits in question were voluntarily dismissed by TRS.

Here’s the thing: While these cases have been wrapped up there are two strings I want to tug at (and that’s why we’re chatting about something as boring as patents — though this case brings some spice).

The first is the criticism I saw in response to DEF’s announcement.

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Amanda Tuminelli, chief legal officer at DEF, told me that they don’t want to promote further patent trolling — especially in DeFi — but they had to take the situation into account, which is what led them to just buy the patent even though Tuminelli felt good about their odds of winning the IPR.

Outside of that, there was also the fact that the cases were originally brought against Maker — a DAO that had to get member support to bring on a lawyer for the case — and Compound Protocol, which is the software and not the entity behind the technology (aka Compound Labs).

The two, Tuminelli said, had the money to take on the legal cases. But smaller projects may not.

Tuminelli is overall hopeful that the DeFi space won’t see more cases like this, noting that it’s a “bad look” to try to patent open-source technology, but DEF — through this legal battle — sought to signal that it won’t take these legal challenges lightly.

Now whether the USPTO totally understands DeFi or blockchain technology (and they probably don’t, in all fairness, given the newness of the tech) is still up in the air.

“Just looking at how slow that evolution has been in the patent legal realm, it can only get better,” Tuminelli said. While her case was one of the first blockchain ones that some of the lawyers representing DEF had seen, they were quick on their feet to learn about the necessary tech, Tuminelli noted anecdotally. Perhaps the USPTO will be adaptable, too.

Overall, we probably won’t see an uptick in patent infringement cases, and we can pretty much count out these cases being brought against smaller firms.

Josh Tucker, intellectual property law partner at Pillsbury, confirmed that these legal cases generally mean that there’s potentially a lot of money to be won in damages (on the patent owner’s side), which is what leads to them. And they’re generally “incredibly expensive.”

“It’s really rare to see a patent suit against somebody doing just a few million dollars in revenue,” he said.

And, Tucker added, the power balance has shifted which would benefit projects being targeted by patent infringement suits.

DEF succeeded in ending the patent trolling in this case, and perhaps this is enough of an example for the community to rally around keeping open-source technology, well, open-sourced.

— Katherine Ross

Data Center

The MakerDAO protocol has been profitable every month since at least January 2020, ranging from $38,000 in May 2020 to $22.35 million profit in May 2021.
February 2024 was MakerDAO’s second-best month in that period, earning $21.8 million profit. Most of its revenues come from interest.
DAI’s supply has increased by $1.3 billion over the past year, from $3.9 billion to $5.2 billion, but almost all of that growth occurred last November.
Crypto is mostly red so far today, but only just. SATS (11.5%) and EOS (1.6%) are the only top-100 tokens to gain more than a percent.
dYdX is currently the top chain for daily derivatives volume, posting $1.283 billion to Hyperliquid’s $1.218 billion. Monthly dYdX volume is up 300%.

Burn after reading

Deflationary cryptocurrencies are extremely rare.

You can probably blame the SEC for that. It used to be that projects would primarily fund themselves with initial coin offerings, as was the case with TRX, BNB and TON.

Now that Gary Gensler’s agency has all but stamped those out, making new supply is how development teams and other entities pay themselves for the work that they do, and it’s also how early investors capitalize on their funding rounds.

It’s of little surprise then, that out of the top 250 or so by capitalization — a group which represents the overwhelming majority of the crypto market — less than two dozen have seen their circulating supplies reduce over the year to date.

That mostly includes coins with burn mechanisms tied to user activity, as with TRX and LEO. There’s more gimmicky schemes found in memecoins MOG and NOT. Others have minor differences in supply that would barely make a dent to overall market dynamics.

TRX, for instance, has burned $169.7 million in TRX, valued at current prices, a supply reduction of 1.51%, while LEO has burned 0.25% of the supply worth $2.6 million right now.

It’s unlikely those initiatives have really made a difference, but they couldn’t hurt.

Prior to the Dencun hard fork, which brought a cheaper layer-2 fee market to the Ethereum ecosystem with blobs, ether was also deflationary.

Loyal Empire readers would know that encouraging so much user activity to move over to layer-2s like Arbitrum, Optimism and Base has come at a cost.

There’s fewer mainnet fees to burn but still the same amount of ETH to distribute to validators each block — those two conditions make for a steady stream of inflationary Ethereum blocks.

As of this morning, ETH’s supply had grown by 0.07% so far this year, equal to 87,181 ETH ($238 million).

BNB is otherwise by far the most valuable experiment in token burns.

*BNB’s supply has reduced by $11.6 billion since October 2021, valued at current prices*

The team behind BNB actively destroys billions of dollars of the token every quarter. Burns come from a variety of places, including a slice of BNB Chain gas fees and tokens that have been proved to be lost (which can be reclaimed via a special program).

For scale, the Solana blockchain over the year to date has added $5.5 billion to the SOL supply — equal to 8.72%. Zooming out to three years, SOL’s supply has increased by 59%, worth over $25 billion at current prices.

Not that any of it seems to matter. SOL outperformed practically the entire crypto market while billions were being added to its supply.

And BNB, for all its burns, has closely tracked the price of bitcoin in the past three years, sans a small break in the correlation around the collapse of FTX. If burns really do make a difference on the price of BNB, then whatever impact is yet to appear.

Special mention goes to the TON Foundation. It locked 25% of TON supply in April — $6.9 billion at the time — those tokens will eventually be seeped back into the market starting next year.

The price of TON rose up to 25% in the five weeks after the supply was locked, but it has since given up all of those gains.

The TON supply has also continued its inflationary bent since the lockup, increasing by almost 4.5% in the past 11 weeks, the equivalent of $674.5 million at current prices.

But at least for the big two, it’s safe to say that burn functions are mostly good for headlines and positive vibes, rather than any meaningful impact on prices. Maybe over a longer horizon, and especially if bitcoin stops leading the market.

— David Canellis

The Works

Hamster Combat, the viral crypto game on Telegram, said it turned down venture capital funding and called it “exit liquidity.”
The liquidators of Three Arrows Capital are seeking $1.3 billion from Terraform Labs, Bloomberg reported.
Binance executive Tigran Gambaryan is ‘mostly bedridden’ as his health deteriorates in Nigerian prison.
A report from Halborn warns that DeFi hacks remain a threat despite a huge decline last year, CoinDesk reported.
Polymarket announced that it’s teaming up with Perplexity AI, which will provide AI news summaries.

The Riff

Q: Is gambling on news headlines the next big thing in crypto?

No question that prediction markets have been legitimized. So much so that we haven’t even seen the usual fear mongering from the mainstream media about crypto-powered assassination markets this time around!

It would be great to keep the ball rolling for Polymarket, especially outside the context of betting on the US election.

A prediction market for every news headline and pop culture event would go a long way for that, even if it would surely be tacky at times (remember betting on the fate of the Titan submersible?)

Gambling is one of the oldest use cases for crypto (and blockchain for that matter). Early versions of Bitcoin had even the sketches of an integrated, onchain poker game, included by Satoshi Nakamoto. Polymarket is just carrying the torch.

— David Canellis

I don’t know if I want to say it’s the “next big thing” but it’s definitely a use case. And, hell, it’s a good example of “put your money where your mouth is.”

I could see folks getting exhausted and burnt out (not to imagine spent) on trying to bet on the right outcome for big news events, but we haven’t quite gotten there yet.

We’re seeing markets for things like the topics Elon Musk and former President Donald Trump would hit on (which ended up a $5 million market) and whether or not Trump would tweet again before the election (spoiler alert: he did and there was nearly $830,000 on the line).

Then there are non-political markets like who’s going to win the Super Bowl — $5.9 million has been bet so far, and the season hasn’t even started. Maybe there’ll be niche markets for reality TV shows like Love Island US, given that folks are already betting on Baby Bieber’s gender.

I think there’s definitely a place for these markets, and it helps to build a bit of a community with financial stakes. But I’m wary of the human attention span post-TikTok.

Gambling’s having its moment both in and out of crypto, though, so perhaps I’m wrong and this is one of the best use cases we’ll ever see for crypto.

— Katherine Ross

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