How Can a Derivative Protocol Use a Token Burn Mechanism to Manage Protocol Debt?

A derivative protocol can use a token burn to manage "protocol debt" or "system surplus" by buying back and destroying its own governance or utility tokens from the open market. When the protocol runs a surplus (e.g. from liquidation fees or trading fees), it uses those funds to buy the tokens.

Burning them reduces the circulating supply, which theoretically increases the value of the remaining tokens, effectively distributing the surplus back to the holders and reducing the overall debt liability of the system.