Token Burning: What is it, Why do it?

At its most fundamental level, burning crypto means sending tokens to an address from which they can never be retrieved or spent. This “burn address” is typically a public address with a crypto token burn meaning private key that is unattainable. Once tokens are sent to this address, they are effectively “burned” or destroyed, reducing the total circulating supply of that particular cryptocurrency. Token burns refer to the process of permanently removing a certain number of cryptocurrency tokens from circulation.

What is coin burning in cryptocurrency? Token burns explained

The current supply of ETH stands at 120,214,757, with supply growth demonstrating a decrement of about -0.96% per year since the commencement of the burning process. Tokens sent to a burn wallet are permanently removed and can’t be retrieved. Modifications to https://www.xcritical.com/ current algorithms might fix some of the drawbacks and lead to their easier implementation. We could see the automation of processes using smart contracts, ensuring that the burning triggers without anyone’s interference under certain conditions. Protocols that use proof of burn include Ripple, BitShares, Slimcoin, Counterparty and Factom. “This acts as an incentive to keep the network secure, as miners are rewarded with new coins for destroying their old ones.” Machikhin said.

Other Notable Token Burn Events

Burning crypto may be implemented as a consensus mechanism, referring to the encoded systems that keeps a network in agreement. Bitcoin, for example, uses a proof-of-work protocol that incentivizes miners, or validators, to verify transactions with a sum of tokens known as block rewards. By solving complex, computational math equations, they receive an allotted amount of Bitcoin, which halves every four years. They receive one for every Solana token, known as SOL, staked, or locked up, through Marinade’s platform. On Solana’s blockchain, these liquid staked tokens managed via Marinade show up as mSOL. So when a user is ready to reclaim their Solana tokens, the mSOL must be burned in order to maintain an accurate circulation number of mSOL to SOL in the protocol.

What Is Cryptocurrency Burning?

Companies can perform buybacks for various reasons, including driving the price of the remaining stocks up or preventing hostile takeovers. Essentially, the goal is to endure potential short-term losses for long-term gains. Naturally, the process doesn’t involve actual fire but rather an intelligent solution for permanently disposing of digital assets. While the phrase thoughtfully describes the process, there’s much more going on behind the scenes. Not only that, but knowing the upsides and drawbacks of burning crypto can help you stay ahead and make better investment choices.

Most of the time, it’s the developers of a cryptocurrency who decide to burn a certain amount. Coin burning reduces the supply, making tokens of that cryptocurrency scarcer. That scarcity can lead to an increase in price and benefit investors. Some algorithmic stablecoins use burning as a method of keeping the asset pegged at a certain price.

The actual impact on token value also depends on broader market conditions, investor sentiment, and the fundamental value of the project. Token burns are just one of many factors that can influence the price. Certain volatile cryptocurrencies and tokens undergo the burning of a portion of their supply to help stabilize their price in terms of USD.

At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. 11 Financial is a registered investment adviser located in Lufkin, Texas. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. If there are errors or vulnerabilities detected in a token’s code, one solution can be to burn the affected tokens and issue new ones that are free from those issues. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. Bored Ape Yacht Club creator Yuga Labs’ Otherside metaverse project resulted in $157 million worth of Ethereum being burned as customers rushed to mint Otherdeed NFTs.

As we’ve seen with projects like Kaspa, it’s not just about controlling supply or boosting value; it’s also a testament to a project’s commitment to transparency and its community. As the crypto landscape evolves, understanding the nuances of token burning becomes crucial. It’s not just about the tokens that vanish but the underlying principles and intentions that drive such actions. As enthusiasts and investors, staying informed and discerning the genuine intent behind such practices will be key in navigating the ever-complex world of cryptocurrencies. However, it is essential to approach token burns with a clear understanding of their benefits and potential drawbacks.

So the project poses some pretty deep questions about the value of art, the value of money and your personal values. That’s a great question – and the answer can be found with a quick recap of the dynamics of supply and demand. As of August 23, 2023, 3,559,967 ETH have been torched, as reported by ultrasound.money.

The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility. There are several types of token burns, each serving different purposes and stemming from various motivations. Publicly traded companies buy back stock to reduce the number of shares in circulation. In general, this practice is intended to increase the value of the shares while increasing the company’s financial performance.

Token burns can also be used to align the incentives of project owners with those of coin holders. Once coins are sent to this ‘burn address’, they are effectively rendered unusable, thus reducing the total supply of the cryptocurrency. Transparency and trust are crucial in the cryptocurrency world, where regulatory frameworks are still evolving and market volatility is high.

This shift away from short-term speculation could help to stabilize the cryptocurrency and foster a more sustainable ecosystem. Consistent and transparent coin burning practices can build trust within the crypto community. When a project demonstrates its commitment to managing supply and promoting token value, it may gain credibility among its community members by aligning their incentives.

In a sense, the burn transferred value from the pool to individual holders of the token. The aim here is to reassure potential investors that the future supply of the token will continue to shrink, calming concerns of inflation or an overly diluted market. As a result, this practice can also add to the appeal of a token as a «store of value.» “Burning” crypto means permanently removing a number of tokens from circulation. This is typically done by transferring the tokens in question to a burn address, i.e. a wallet from which they cannot ever be retrieved. Rebasing is a more complex mechanism where the token supply is adjusted automatically based on market conditions.

• The massive burn aimed to increase the scarcity and value of XLM tokens, benefiting the Stellar ecosystem and its traders.
• Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.
• These are burns initiated manually by the project team or governing body.
• If a project identifies an error, such as a faulty smart contract or an accidental creation of excess tokens, they might send the erroneous tokens to a burn wallet.
• These burns occur automatically based on predefined conditions, such as transaction volumes or periodic intervals.
• As a result, tokens sent to the burn address are considered permanently removed from circulation.
• The amount destroyed represented about 50% of the SHIB token supply.

A new cryptocurrency can launch with 1 trillion tokens worth a fraction of a cent and attract investors because of the low price. Later, the developers can burn billions of tokens to raise the price. The process of token burning is most commonly initiated by developers and project owners. Many projects have built-in burning mechanisms that are familiar to investors from the get-go.

The Ethereum blockchain has a well-known burn address that starts with a string of zeros. Over the years, a significant amount of Ether (ETH) has been sent to this address, either intentionally for burning or accidentally. If a project identifies an error, such as a faulty smart contract or an accidental creation of excess tokens, they might send the erroneous tokens to a burn wallet. Functionally speaking, this allows projects and individuals to have verifiable proof recorded on the blockchain that the tokens sent to the address have disappeared from circulation. The strategic maneuver creates scarcity, he explained, thereby boosting the perceived value of a coin. This increases demand simply because there would be fewer available units attached to a specified good or service.

This can be done in one large transaction or multiple smaller ones over time. In practice, the deflationary tactic has produced other favorable outcomes. The decision to burn crypto may be written into a project’s whitepaper prior to launch, outlining full intent to nix fractions of its supply along the way.

The mechanic works by burning tokens when the asset’s price is low to reduce supply and better match demand. Often, algorithmic stablecoins mint more of the currency to increase the overall supply when the opposite situation occurs. Projects send tokens to the burn wallet to reduce their circulating supply, potentially increasing scarcity and value. A burn wallet is a specific type of cryptocurrency address to which tokens can be sent but never retrieved. It’s designed in such a way that its private key is either unknown or unobtainable.