Recently, the effective computing power of Filecoin's entire network has exceeded 2EiB, and the network baseline of 2.5EiB is just around the corner, attracting the attention of many miners and investors. However, careful miners have discovered that while the effective computing power of the entire network is growing rapidly, the amount of FIL destroyed is also increasing. As of 16:30 on February 3, the amount of FIL destroyed has reached 14,905,820 FIL, accounting for 0.745% of the total amount and 18.86% of the circulating amount. This phenomenon has triggered an in-depth discussion of the token burning mechanism and its future value.
What is token burning?
Token destruction refers to the permanent removal of tokens from market circulation, which means that destroyed tokens can never be used or transferred again. A common method of token destruction is to send tokens to blackhole addresses, which do not have private keys and can no longer be accessed. Taking Bitcoin (BTC) and Ethereum (ETH) as examples, their black hole addresses are:
BTC’s black hole address: 1BitcoinEaterAddressDontSendf59kuE
ETH’s black hole address: 0x0000000000000000000000000000000000000
In this way, the token will disappear permanently after being hit into the black hole and cannot enter the market circulation again.
Why Token Burning?
The reasons for token destruction can be summarized as follows:
Prove user investment: Some projects use the PoB (Proof of Burn) mechanism to prove users' investment in the network by destroying tokens, thereby gaining the right to mine and verify transactions.
Increase the value of the token: By reducing the amount circulating in the market, the scarcity of the token increases, thus increasing its value. For example, platforms such as Binance and Huobi regularly destroy a portion of their platform coins to maintain their currency prices.
Other reasons: Some tokens may be destroyed due to user error or intentional sending of tokens to a black hole address, or the smart contract of some projects sets a default Gas burning address.
FIL’s destruction mechanism
According to the description in Chapter 6, 6.2 of "Creating the Filecoin Economy", the destruction mechanism of FIL mainly includes the following two points:
Miner penalty mechanism: During the mining process, if storage failures and consensus failures occur due to subjective or objective reasons (such as mining machine power outages, data encapsulation interruptions, etc.), if they cannot be repaired in time, miners will be punished. These punished FILs will directly enter the black hole address and will not be owned by the system.
Handling fee burning: According to the EIP1559 protocol, the Filecoin message on-chain handling fee will be directly burned. These fees are composed of packaging fees paid to miners and direct burning fees, which mainly include network transaction fees for on-chain computing and bandwidth.
The future value of FIL
According to Filecoin’s economic model, the total amount of FIL is 2 billion. Although the rapid growth of the effective computing power of the entire network has increased the output of FIL, the circulation of FIL will gradually decrease due to the punitive destruction mechanism. In addition, with the combined effect of the halving and destruction mechanisms every six years, the total circulation of FIL has formed a deflationary trend. This continued deflationary effect will directly stimulate the currency price of FIL, and it is expected that the price of FIL will show an upward trend in the future.
On the other hand, as the IPFS/Filecoin ecosystem continues to expand and become active, the demand for FIL will also increase. When all FIL is released in the future, even though the entire network will no longer produce FIL, its commercial value will continue to increase as the Filecoin ecosystem prospers. Driven by the destruction mechanism, the circulation of FIL will continue to decrease, while the demand for the Filecoin ecosystem is rising (such as increased ecological applications and increased network search services), which means that the appreciation space of FIL will continue to expand.
Summarize
Overall, the destruction mechanism of FIL is very necessary. The deflation model formed through the destruction mechanism not only ensures the positive cycle of the Filecoin network economy, but also achieves the healthy development of the Filecoin network ecology. As the market demand for FIL increases and the destruction mechanism continues to function, the future value of FIL is expected to continue to grow. This makes FIL not only a digital currency, but also an investment target with huge potential.