The concept of token burning was proposed in the early days of cryptocurrencies as a way to protect the value of assets by reducing their supply. It is the process of permanently removing tokens from circulation to increase demand. Ethereum and BNB were the first to implement the mechanism and it is now widely popular among proof-of-stake cryptocurrencies
What Is Token Burning And How Does It Work?
Token burning is the process of removing a portion of a cryptocurrency’s supply to protect its value in the long run. The mechanism popular in proof-of-stake (PoS) blockchains involves developers and validators allocating a certain portion of the token supply to be removed from circulation and deemed unspendable.
Tokens are burnt to achieve specific goals of the blockchain. During the process, the tokens are sent to the burn address, which is a wallet that is inaccessible and permanently holds the funds without the possibility of retrieval. This way the tokens are removed from supply. The transaction can be verified by users of the blockchain. These addresses do not possess any private keys which makes them impossible to access. By doing this it effectively reduces the whole supply of the cryptocurrency.
When a cryptocurrency is burned the coin will be transferred to a wallet address that can only receive coins but cannot send coins. These addresses are also known as “eater” or “burner” addresses.
Reasons For Crypto Burning
Many reasons are presented for crypto burning, in some cases it will be accidental but in some cases, it will be intentional.
- Supply management: It protects the value of the cryptocurrencies by controlling their supply.
- For attention: Sometimes the burning will be done just to attract more heads. It is also used to create scarcity, which increases the token’s value.
- For destroying scam crypto: The mechanism helps get rid of scam coins received via airdrops. Sending it to the burn address of a blockchain will eliminate them from supply.
Is It Good Or Bad?
Even though it might sound like it is good to make the crypto burn to improve the value of the cryptocurrency, it is not that simple. It can benefit the crypto but on the flip side, there will be some consequences also. When it comes to the effectiveness of the cryptocurrency price while burning them, it depends on the sentimental factor and the planning of the investors and the community.
In the case of more popular cryptocurrency whenever there comes a situation where the crypto is heading towards a dead wallet, it will be trending on the news and will get more hikes. But it is not guaranteed to happen like this for every cryptocurrency, for far less popular cryptocurrencies might find it hard for this level of hikes. The result of burning can only be discovered by the character of the cryptocurrency and its community.
Why Token Burning Is Important?
It is a permanent event that cannot be changed no matter what happens. It exclusively puts forward the result of the long-lasting commitment of users to their roadmap. The simple aim of this burning is to get a balance between supply and demand. There should be a proper supply for the demand otherwise it will imbalance the crypto world. When some extra tokens are burned down then there will be a spike in the need for newer tokens and it will increase the demand for that particular token. Many users and even trading companies use this approach to get more value for their tokens which they hold for a very long time.
Purpose Of Burning Cryptos
- Enhancing the total value of the cryptocurrency by creating a scarcity of the cryptocurrency that will affect the demand for newer tokens.
- Some cryptocurrencies work through the Proof of Burn (PoB) mechanism which needs the network participants to burn the tokens to create new blocks. For example, Slimcoin is a cryptocurrency that works in this mechanism. It provides an opportunity for a miner to burn coins which not only gives them the option to compete for the next block but also allows them to get more blocks in the long run.
- It helps ensure long-term price stability for the cryptocurrency. Positive for investors looking to hold the asset in the long run.
Conclusion
The token-burning mechanism is more prevalent in proof-of-stake blockchains. It helps to create a balance in the usage of tokens, control inflation, and provide more price stability. As everything in the crypto world is not predictable the concept of crypto burn also doesn’t guarantee hikes in the values of the cryptocurrency. Conduct proper due diligence before making any investment decision in the crypto market.
