Buyback and Burn Mechanisms: Price Manipulation or Value Signalling?

With Darcy WE Allen and Sinclair Davidson. Available at SSRN

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.