With so many new tokens emerging, one would expect the cryptocurrency community to contain many tokens with little to no value, but with the help of token burning, that’s not the case. Burning tokens is a not-so-new concept that has become popular in the crypto community, and new users are interested in it.
But the method in which a project partakes in token burns can be a little complex, and you should ensure you fully understand what a token burn means for you.
Reading this article will help you learn about the token burning process, how token burning can be executed, and what token burns might result in depending on how they are executed.
What is Token Vurning?
Token burning is the process by which a crypto coin project burns a certain amount of its crypto coin digital assets. The process involves transferring some amount of Cryptocurrency (specifically Token Coins) into a burn wallet address (also known as burner wallet) with no private key. Some may believe that sending tokens to a wallet address is all it takes to participate in coin burning.
But coin burns are more complex than a transfer. Many projects have made several methods, terms, conditions, and incentives available for users burning cryptocurrency at a small portion. But one thing is sure; coin projects often burn large portions of their coins.
Coin burning means once coins have been sent to a burn address, they become permanently excluded from the overall circulating supply of coins in the crypto coins market and, therefore, forever inaccessible for exchange or other transactions.
Coin burning is similar to a company buying a large number of its shares, but it's different because coins burnt can not be resold, unlike shares.
How Does Token Burning Work?
Burning crypto is a process that can and has been executed by many individuals and developers in the coin market for several years. Some token developers like Binance have been partaking in a periodic burning of their tokens and have executed this in quarterly burns since 2020.
Binance has burned around half of its total coin supply since it began partaking in cryptocurrency-burning procedures.
Over 860 BNB is burned daily on the Binance platform, and a portion of the BNB burned coins are gas fees spent through the Binance BSc platform. Binance has destroyed around 2,065,152 BNB coins to partake in burns.
Private keys are the only secure way of accessing coins stored in a wallet address. Therefore no one can access a wallet address with no private key.
A cryptocurrency project can burn tokens by transferring them to a frozen private address; anyone can do the same with their own tokens.
Various projects may differ in their methods of allowing users to partake in token burning, but the idea remains the same. By burning cryptocurrency, a project can reduce the total supply of its tokens in circulation and gradually increase its value over time.
A frozen private address is a burn address with no private keys for granting access to coins.
Once tokens are sent to a frozen private wallet, those tokens are automatically burnt from the overall circulation tokens in the coin market and therefore become inaccessible to any user.
Another example of a method created for burning cryptocurrency is the burn portal created by Shiba Inu for burning Shib tokens and rewarding anyone who uses it.
Why Do Crypto Projects Burn Tokens?
Cryptocurrency projects burn their tokens for several reasons. However, the main aim behind such an activity is to add value to tokens still in circulation by having more personal control of the overall supply of tokens demanded.
Markets function through demand and supply, and crypto projects use burning to reduce supply, increase demand and potentially add value to their crypto.
Below are some reasons why projects burn crypto:
Burning tokens Increase Value
Demand and supply are economic factors that can influence the value of commodities, and those commodities can also be tokens.
Cryptocurrency projects believe that the total available supply of token coins in circulation can alter the value of new coins added to the circulation supply.
Such projects partake in cryptocurrency burning at large amounts that help increase the value of their tokens.
Reducing the supply of token coins in the crypto market is a great way to generate value when implementing the laws of demand and supply. The value of the token coin will continue to increase as users keep requesting them even when they are few in the circulating supply.
Token burning makes coins scarce. A cryptocurrency project can use scarcity to create an urgency for their community members to buy more coins, increasing value and demand over time.
Proof of Burn
Proof of Burn (also known as PoB) is a consensus mechanism that validates and adds transactions to any blockchain that implements it.
With PoB, coins get burned without energy waste by consuming a few resources to mine the coins you burn, and it also grants you the ability to write blocks equivalent to burnt ones. The PoB also helps to prevent fraud by verifying the transactions of new blocks added to a blockchain network.
Promote Mining Balance
The periodic burn of sizable digital asset coins has provided a more balanced mining ecosystem by reducing the advantage early investors had over more recent investors. Now the blockchain network can benefit investors equally and provide value everyone can access.
Pros of Token Burning
Supporting the token value
The change in the value of tokens can be significantly affected by a reduced supply of that token in circulation. This result is one that many projects achieve as they burn large amounts of their coins in circulation.
Coin burning strengthens the Community
The process of coin burning is a journey that can help a cryptocurrency community feel more involved. It builds trust in the road map and the system designed for its token community.
Cons of Token Burning
Permanent loss of token supply
Burnt tokens are permanently excluded from the overall circulating tokens on the blockchain network, making them impossible to recover.
Although the scarcity of a token may add value, that value comes from the continuous burning of large amounts of that token. Such activity leads to a constant loss of coins over time. Large amounts needed to impact the token price
For burns to impact price significantly, large amounts of that token are required to be burned.
Although token burning may be effective, it is expensive and can easily lead to a token project’s demise.
Token burning risks
Some companies seek a considerable gain from the devaluation of a token. These companies wait for moments when a token experiences a dip, and they buy a considerable amount of that token, only to sell it all after a little pump.
Companies that partake in this are called hidden whales, and they can lead to a token burn backfiring against a token project.
Some projects may pretend to strengthen their network by transferring vast amounts of their tokens to a wallet.
Although these projects claim to send their community token to a burn wallet address, they send it to a wallet address where they can retrieve it.
Some projects crash their tokens by doing this, which can be tragic for community members.
By burning, projects are providing a stable token value that can benefit investors greatly, and as we all continue to partake in token burns, the blockchain network strengthens.
But the burning process can differ across several platforms, and before partaking in it, it would be best if you fully understood what it means.