Buyback and Burn Mechanisms: Price Manipulation or Value Signalling?

8 Pages Posted: 30 Sep 2022

See all articles by Darcy W E Allen

Darcy W E Allen

Royal Melbourne Institute of Technolog (RMIT University)

Chris Berg

Royal Melbourne Institute of Technolog (RMIT University)

Sinclair Davidson

RMIT University

Date Written: September 28, 2022

Abstract

A core finding in traditional corporate finance is that manipulating funding instruments does not increase the value of a firm. Several Web3 projects have mechanisms to buy their tokens on the market and burn those tokens. If the finding from corporate finance holds in the Web3 environment then this manipulation of the value of tokens should not increase the value of those projects. This paper asks if these mechanisms serve more of a purpose than price manipulation. We provide an efficiency explanation for buyback and burn mechanisms: value signalling. A buyback and burn enables projects to signal that their business model has genuine network effects, and that it is not a Ponzi scheme. This finding has implications for the motivation, justification and design of buyback and burn mechanisms across Web3.

Keywords: Buyback and Burn, Network Effects, Web3 Tokens, Cryptocurrency, Token Economics, Tokenomics, Costly Signalling

Suggested Citation

Allen, Darcy W E and Berg, Chris and Davidson, Sinclair, Buyback and Burn Mechanisms: Price Manipulation or Value Signalling? (September 28, 2022). Available at SSRN: https://ssrn.com/abstract=4231845 or http://dx.doi.org/10.2139/ssrn.4231845

Darcy W E Allen (Contact Author)

Royal Melbourne Institute of Technolog (RMIT University) ( email )

Melbourne, 3000
Australia

Chris Berg

Royal Melbourne Institute of Technolog (RMIT University) ( email )

124 La Trobe Street
Melbourne, 3000
Australia

Sinclair Davidson

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000
Australia

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