Burning vs. Locking — What Should You Do With Your Liquidity?
Let’s go straight to the point — both practices are meant to help build community trust, however, can investors really trust tokenized projects that believe it is a good idea to burn their liquidity (LP) tokens?
Hint: it is not a good idea to burn your LP tokens.
Token burning is a process where liquidity provider tokens or regular tokens are either sent to a burn address, or burnt using a dedicated function, natively available for some token smart contracts (not applicable to LP tokens). Once a token is burned it is forever inaccessible.
Token burning reduces circulating supplies, which is intended to reduce price volatility. It can also be seen as a short term thinking strategy. Burning tokens does not guarantee an increase in the token’s value. When done incorrectly, it often winds up negatively affecting projects and their ecosystem of stakeholders.
1% of a any total supply, for example, could be worth a substantial sum of money (USD equivalent value) in the future. Burning it indirectly implies that the project team does not believe they will get there anymore. Now this is when token burning is done “correctly”.
Countless projects do not burn their tokens properly and investors should beware. Some decide to send their tokens to Vitalik’s address, thinking that this is a sure way to burn them. VB does not approve the practice, and in turn has sometimes sold some of these tokens in order to warn project owners not to do this.
Another more reckless practice is the method of sending liquidity provider tokens to burn addresses. Doing so results in project owners’ longer term inability to remove liquidity from the pool and a loss of control of their supply. This also makes it impossible to migrate liquidity to new exchange protocols (Uniswap V3, V4, or other chain liquidity spreads to further expand their ecosystem token utility).
For investors reading this, beware — sometimes malicious actors may also announce they are ‘burning tokens’, but in fact are sending them to a wallet they can access. It is important to verify yourselves on the chain explorers (Etherscan, and alike).
➡️ Projects who want to effectively build trust with their communities lock their liquidity.
Liquidity locking allows project owners to maintain some control over their token’s liquidity and puts them in a better position for long term growth. Liquidity locking also signals to investors that the project is taking security very seriously while complying with decentralized high standards (prevents the LP tokens from being moved unexpectedly, for instance). Acting as such induces more confidence & trust from investors and ecosystem participants.
Lockers also help increase a project’s exposure (while burning does not). When a project’s liquidity is locked, it displays on charting platforms thanks to our API collaborations, and overall boosts tokens’ security score. Token locks information remains also available and displayed on our own website/app.
For more information about liquidity locking and token vesting, we recomend to check out our LP Locker Overview article or head to our website and to learn more about the industry’s most reputable liquidity lockers — made with love by UNCX Network.
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