Hi Timmi,
Burning assets without adding liquidity lacks value. Instead, it is much better to recycle the funds obtained from burning, as it provides higher profits to liquidity providers, making them more likely to invest in the protocol, especially in ADA/MIN.
By increasing liquidity, the impact on the price would be significantly reduced, as liquidity would be more concentrated. Additionally, by holding assets long-term and taking advantage of compounding interest, MIN would become deflationary more quickly. This is better than simply burning the asset, as there would be no compounding interest involved.
Let me give you an example: If ADA and MIN had a 1:1 ratio, someone exchanging 1000 MIN would pay a fee of 0.6% in ADA, which is equivalent to 60 ADA. In return, they would receive 940 MIN. If that person decided to exchange those 940 MIN back for ADA, they would pay a fee of 56.4 ADA and receive 883.6 ADA.
In this case, liquidity providers would have gained profits of 114.4 ADA/MIN. These profits would accumulate and allow them to participate with more assets, as that benefit of 114.4 ADA/MIN would increase by 0.6% each time new transactions are made. This gain would be potentially infinite if many assets are accumulated long-term (similar to being a “whale” in financial terms).
However, if nobody takes those assets and only focuses on burning MIN, liquidity would decrease, participation would diminish, inflation would increase, and the price would collapse, as is currently happening. In summary, there would be no real gain in the asset because there would be no reason to hold MIN.
If those assets are simply sent to a dead wallet, it would be the same as holding those assets long-term without using them, which would have no benefit, and the money would be lost without any purpose. Burning assets is a problem rather than a solution. An example of this is the case of CAKE, where they burn 8 million assets weekly through transactions, and the price decreases despite the burning. There is no real incentive for the asset, and the only utility it offers is the inflation associated with staking.
If those assets were recycled, the investment would grow exponentially as they would reach their maximum supply faster, and those 8 million assets, instead of inflation, would be distributed among stakers, significantly increasing holders and liquidity. Think about it, burning makes no sense. Without associated fees and without rewarding liquidity providers, there would be no liquidity providers, and the impact prices would be extremely high, which would be more detrimental. Instead, a 0.6% fee (or possibly 0.5%) as I propose would be fairer. Trust me, a whale would prefer to pay a 1% fee instead of facing a 10% impact price. For example, I recently exchanged the asset and paid more than a 0.3% fee in impact price plus the fee.
In conclusion, burning assets is harmful because it reduces liquidity, decreases participation, increases inflation, and causes a decrease in price. Recycling assets and rewarding liquidity providers with fees is a much more beneficial strategy, as it increases liquidity, promotes compounding interest, and attracts more investors to the protocol.
I hope this explanation is clearer and more understandable.
