Token Burning: What Does Burning Crypto Mean?

Maintaining the value of an asset can be difficult to accomplish. When it comes to cryptocurrency, many people worry about the high number of coins in circulation and the oversupply of coins that dilutes their value. This has led to several innovative ways to incentivize investors and help maintain a coin’s value.

Burning cryptocurrency is a popular method of boosting the value of a coin or token. Essentially, token burning removes coins from circulation, permanently decreasing the overall supply of the cryptocurrency. This helps to increase scarcity and raise the value of each remaining coin, which is crucial for coins that can be mined quickly.

Key Takeaways:

• Token burning gradually decreases the total supply of a crypto token in circulation, based on its unique burn rate schedule, in order to increase each token’s value through scarcity.

• Some notable token-burning crypto projects include Binance Coin, Ethereum and Shiba Inu tokens.

• A token burn mechanism can range from fee burns and buyback burns to meme burns and accidental burns, indicating a crypto owner has permanently lost access to these tokens.

What Is Token Burning?

Token burning means removing coins from the overall supply of a cryptocurrency. This typically involves sending the coins or tokens to a wallet with no known private keys. This wallet can only receive assets, thus effectively making them inaccessible.

While burning a small portion of coins can help maintain the value of a cryptocurrency, the token burning process is often a community effort. Occasionally, substantial token holders or persons with a large social media following will encourage a community burn. When everyone burns a small number of their holdings simultaneously, it can make a notable difference in the overall number of coins in circulation — and, therefore, in a coin’s value.

In other cases, token burning happens steadily over time. Many users don’t even notice it. For example, Ethereum burns a small percentage of Ether during each transaction. This adds up over time, which can increase the coin’s value as supply steadily decreases.

How Does Token Burning Work?

Cryptocurrencies generally have specific instructions and processes in place for burning tokens. The most common burn mechanism involves sending tokens to an unusable wallet address, effectively taking them out of circulation. Technically, therefore, all a user needs to do in order to burn coins is send them to a wallet with an invalid address.

Some cryptocurrency projects establish their own token burn mechanisms. For example, in April 2022, Shiba Inu released an easy-to-use burn portal. By working with Ryoshis Visiondevelopers, Shiba Inu offers rewards to anyone using the burn portal to destroy SHIB tokens.

Other cryptocurrencies use a burn function to destroy assets. Binance Coin has a burn function that any cryptocurrency holder can execute simply by stating how many coins in their wallet they’d like to destroy. A smart contract first checks to see if the holder has the coins available in their wallet, and then subtracts them. Binance Coin then automatically updates the total number of coins in circulation.

Keep in mind that any coins burned will be permanently removed from your account — and there’s no way to return them. Before you execute a burn function or send tokens to a null address, double-check to make sure that all of the amounts and information you’ve specified are correct.

In other cases, the token burning process is automatic. For example, some networks burn a small portion of cryptocurrency during mining, or as a transaction fee.

Applications of Token Burning

There are several reasons why cryptocurrency holders burn coins and tokens. As technology continues to expand, people are finding more innovative ways to utilize burning. Here are a few examples of how token burning can be used.

Proof of Burn

Proof of burn (PoB) is a consensus mechanism that verifies and validates a transaction. This algorithm enables miners to burn coins effectively with no energy waste. PoB can be verified using a blockchain explorer if needed.

PoB has several practical uses. It’s primarily used to prevent fraud by automatically verifying each transaction. It also maintains miners’ ability to mine new coins, as several cryptocurrencies require miners to burn coins first in order to mine new blocks.

Increase Value

Typically, token burning aims to reduce the overall supply of a cryptocurrency, thus raising demand. Theoretically, prices will rise if demand is high and token supply is low.

Another possible reason coin prices can increase after a burn is publicity. Many large token burns are community-driven. In some cases, these token burns are coordinated through social media. At other times, an investor will intentionally burn a large portion of the tokens in circulation and post about it on social media. This can raise awareness of the cryptocurrency, further increasing demand and raising the price per token.

Promote Mining Balance

Keeping a network efficient can be difficult. Every time a new token is created it reduces mining speed. This gives many early miners an unfair advantage over new users. Token burning grants miners the right to mine new tokens. Rather than burning one token when mining first begins, the process is spread out and, consequently, more proportionate.

In some cases, miners don’t need to burn the same token they’re mining. Because proof of burn is customizable, networks can offer a variety of rewards to miners. This encourages healthy network activity.

Does Token Burning Affect Coin Prices?

Token burning can impact a token’s value and price. Ultimately, the goal is to create a balance between supply and demand. Although it may not be the main factor causing a significant shift in token price, removing a number of tokens from circulation creates scarcity and potentially increases the value of the remaining tokens. This ensures that demand for the token remains the same or increases.

It’s essential to note that plenty of other factors can influence a token’s price movement, including market sentiment, project fundamentals, overall market conditions, investor perception, political changes and more. Token burning isn’t a guaranteed price appreciation strategy. In most cases, however, there’s a correlation between scheduled token burns and price volatility.

Overall, while token burning can impact coin prices, it’s just one factor among many that can influence the dynamics of the cryptocurrency market.

Pros of Token Burning

While destroying coins and tokens may seem counterproductive, there are several reasons why users burn their crypto.

Maintaining the Value of Coins for Investors

The goal of token burning is to stabilize prices and boost confidence among investors. When demand remains steady, decreasing the overall supply of a coin can lead to higher prices. By burning cryptocurrency regularly or with each transaction, many altcoins can steadily increase demand over time.

Strengthening Cryptocurrency Communities

Behind some of the most popular altcoins are great communities. Successful blockchain projects tend to have several participants advancing them, and numerous investors actively using them. Large community-driven token-burning initiatives can inspire others to invest or become involved with a project.

Cons of Token Burning

Before you start burning tokens, there are several things to consider. If you aren’t burning coins to gain mining rights, you need to consider how token burning affects your portfolio. If the token burning is automatic, consider how often you’ll make cryptocurrency transactions. The way in which a cryptocurrency handles token burning can also influence your investment choices.

Permanent Loss of Assets

In order to burn tokens, you first need to own them. Once the token burn is completed, the tokens are permanently removed from your wallet. That means you no longer own those assets, even if the price per token skyrockets afterward. With some coins valued at well under a penny, this could lead to regret later, especially if you’re burning thousands of tokens at a time.

Before you burn tokens, consider the cryptocurrency’s current and expected value. Identify all of the factors that impact the coin’s price. Then, carefully think about how much you want to burn. Remember that you can’t undo a transaction once it’s completed.

Large Amounts Are Needed to Make an Impact

One of the biggest cons of token burning is that small amounts won’t greatly impact price. For example, there are over 589 trillion Shiba Inu (SHIB) coins currently in circulation. Burning a few thousand $SHIB wouldn’t affect the overall supply. However, the community has burned more than 263 billion $SHIB since October 2021, roughly 0.05% of the total circulating supply.

Examples of Token Burning

Any cryptocurrency can be burned. For example, an estimated 4 million bitcoins have been burned or lost. Other cryptocurrencies have adopted regular token burning into their strategies.

Ethereum (Fee Burn)

In 2021, Ethereum (ETH) introduced the EIP-1159 upgrade, restructured the fee model and began burning Ether with each transaction. 

Ethereum will transition its existing token model to a deflationary crypto asset. Over 3.4 million ETH have been burned using this controlled, steady method, which grows daily. The change in its protocol entails that a fraction of each transaction fee or gas fee will be burned on every successful transaction on the Ethereum blockchain network. Currently, the estimated ETH burn rate is about 1.63 ETH per minute in (24h) as of July 11, 2023.

Shiba Inu (Memes Burn)

Shiba Inu (SHIB) is often in the headlines for initiating large token burns. One way investors are encouraged to burn coins is via the burn portal, which was introduced in April 2022. However, Shiba Inu began making headlines for token burning long before that. About one year after the coin was launched, its creators sent Ethereum cofounder Vitalik Buterin 50% of the total SHIB supply. In response, Buterin burned over 400 trillion SHIBand donated to charity.

Binance Coin (Auto Burn)

Binance Coin (BNB) is known for its Auto-Burn and the Pioneer Burn program. This strategy automatically reduces the number of total coins in circulation each quarter. The first BNB Auto-Burn was in October 2017, when 0.49% of the total supply was destroyed. Because each coin-burning event is automatic, and is based on price and the number of new blocks created on BNB Smart Chain (BSC), investors don’t need to worry about too large a portion of the supply being burned at once.

In addition to the Auto-Burn, Binance Coin (BNB) burns a portion of the gas fees associated with each transaction on the BNB Smart Chain. BNB burns take place once every quarter, and they just completed their 23rd quarterly BNB burn of 2023 in April, with a total of over 2 million BNB burned.

Sweat Coin (Governance Burn)

Sweat Coin is one of the first blockchains to let its community decide whether to burn tokens or not through decentralized governance votes. In April’s governance vote, Sweat Coin introduced a scheduled 100 million tokens for distribution and burning. Over 150,000 SWEAT token holders voted, with 59.487% opting for token distribution and 40.513% for token burning, translating to over 59 million tokens being distributed and more than 40 million being burned.

Is Token Burning Important?

Token burning isn’t essential in order for a cryptocurrency to function. However, as discussed above, regularly burning tokens helps maintain a balance between supply and demand. Investors may focus on the impact coin burning can have on the value of a token, and miners may find coin burning necessary in order to mine new tokens on a network effectively.

Closing Thoughts

While there’s no guarantee that coin burning will increase a cryptocurrency’s prices, it can be a helpful tool for maintaining value and incentivizing investors. 

If you invest in a cryptocurrency, examine its burn strategy to see if it aligns with your own goals. Whether you plan on manually burning coins or using a coin that automatically burns portions of its supply, always have a clear idea of what you’re investing in.

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