Burning Crypto: The Strategy Behind Vanishing Tokens

All cryptocurrencies can be sent to a burn address, which means it’s possible to burn cryptocurrency with any of them. More recently, it has been a common strategy with newer cryptocurrencies that start out what is burning crypto with massive token supplies. The idea behind coin burning dates back to well before cryptocurrency.

Historical impact on tokenomics and market performance

Burning crypto involves miners or developers removing cryptocurrency tokens from circulation. The tokens are sent to a crypto wallet that has no private key, and with no https://www.xcritical.com/ private key, there’s no way the wallet can be accessed. The burn address doesn’t have the private key for accessing what it holds. 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 private key that is unattainable.

Curated Extinction: Token Burning for Art

Coin burns could lead to centralized control when the development team uses burn wallets to hide large token holders referred to as whales. Also, projects can use coin burning to implement scams known as rug pulls. They do this by claiming they have burned a particular amount of tokens while, in reality, the “burned” tokens remain in a wallet they can control. Projects send tokens to the burn wallet to reduce their circulating supply, potentially increasing scarcity and value.

Do you lose money when crypto is burned?

For investors, this potential increase in value makes token burns an attractive proposition. Projects that regularly burn tokens can create a sense of scarcity, which can drive up the market price and generate positive sentiment amongst the trading community. Token burns play a crucial role in the cryptocurrency ecosystem for several reasons.

You may be able to burn your own crypto holdings and keep track of how much crypto is being burned

While token burns offer several benefits, they are not without challenges and criticisms. It is essential to consider these aspects to have a balanced understanding of the practise. This burn was a strategic move to demonstrate the project’s commitment to reducing the total supply and enhancing the value of TRX tokens. It also helped to boost trader confidence and draw attention to TRON’s ambitious plans for the future. Several cryptocurrency projects have successfully burned crypto as part of their strategy.

What Is Token Burn and How Does It Work?

Burning tokens can lead to an increase in the price of those tokens that are still in circulation. An asset’s price can be thought of as a relationship between supply and demand. If there’s less of an asset available to investors than there is demand for it, the asset will command a higher price as it’s traded. Inversely, if there’s an abundance of an asset that doesn’t meet the demand for it, the asset’s price will often fall. A burn address is a digital wallet that can’t be accessed because it doesn’t have a private key attached to it, like a lock that someone never built a keyhole for.

Coin burning in major cryptocurrencies

In the digital realm, burning serves a similar purpose but with the added benefits of blockchain’s transparency and immutability. In total, 44,833,226.65 BNB coins were burned, reducing the initial 200M supply by approximately 22.37%. As soon as a quarterly Auto-Burn takes place, Binance makes an official announcement that specifies the amount of BNB coins that were burned.

Left unchecked, inflation can gnaw away at token value and destabilize prices. In a token burn, the project doing it acquires the tokens that it wants to remove from holders. On the other hand, some coins just don’t need to be burned due to their supply limit. Bitcoin, for example, has a relatively low supply limit of 21 million coins. Because 90% of this total amount is already in circulation, it’s expected that, as the limit edges closer, the price of Bitcoin will rise once the supply can no longer meet the demand.

Stellar, another cryptocurrency company, proceeded with a token burn of 55 Billion of XLM  to increase the coin’s value. The price effect on XLM was quickly noticeable in the short term, moving from $0.069 to $0.088 in a day (around 25% from November 5th to November 6th). Although POB doesn’t destroy coins permanently, it effectively removes them from circulation, creating scarcity and combating inflation. The impact of coin burns on price is generally long-term, as burns have limited short-term influence. Token burns promote healthy tokenomics practices, contributing to a more robust and well-regulated cryptocurrency market.

• Supply and inflation are issues faced by every cryptocurrency project.
• By burning a set amount of coins, one can incentivize miners, or transaction validators, and other stakeholders to continue holding coins.
• The aim of burning tokens is to increase scarcity with a supply-demand imbalance that may increase the token’s value over time, although this is never a guaranteed outcome.
• This provides transparency of the reserves once funds are added or retired.
• They play a crucial role in the tokenomics of many projects, helping to build a healthy and sustainable ecosystem.

Additionally, crypto giant Binance has been burning millions of its native token, Binance Coin. In October 2021 alone, the company burned over 600 million dollars worth of BNB. On a surface level, one may think that this is a pretty crazy thing to do, given the incredible value of the crypto that was burned.

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. Burning crypto has also developed as a low-energy way for blockchain projects to increase their security and stability. When a project removes superfluous tokens from circulation, it reduces the risk of malicious actors having too much control over the market, Machikhin said. Cryptocurrency burning is the process in which tokens (also called coins) are removed from circulation, reducing the number of coins available. The tokens are sent to a wallet address that cannot be used for transactions other than receiving the coins. The tokens can no longer be used because the private keys to the coins are stored in an inaccessible wallet.

Pay using your preferred method like credit card, PayPal, bank transfer, Apple Pay, Google Pay, and many other payment methods. Just enter the amount of cryptocurrency you wish to purchase and follow the steps to complete your order. In July 2023, MakerDAO implemented a Smart Burn Engine (SBE) to manage the protocol’s surplus of MKR tokens. This mechanism functions by automatically kicking in whenever there is a surplus exceeding $50 million in DAI tokens.

With coins large and small, there’s news about how the developers burned millions, billions, or even trillions of tokens. In this article, you’ll learn exactly what cryptocurrency burning is and why developers do it. Token burns contribute to a more stable supply, which in turn promotes market stability. With fewer coins in circulation, the potential for large-scale price fluctuations can be reduced, leading to a more predictable market environment. The concept behind Proof of Burn is that by destroying a certain number of tokens, validators demonstrate a vested interest in the success of the blockchain network. The burned tokens represent the validators’ commitment to the network and grant them the ability to validate transactions, create new blocks, and earn rewards.

With the prospect of value appreciation through coin burning, projects may attempt to encourage long-term investment. This shift away from short-term speculation could help to stabilize the cryptocurrency and foster a more sustainable ecosystem. Token burns can also serve as a method to reward long-term holders of a cryptocurrency.

It’d be best to check the application or platform you’re using to see if it offers crypto burning to users. Some platforms only allow developers to burn the tokens themselves. There are various resources available that can help you track how much of a specific coin is being burned.

Cryptocurrency coin burning is a deflationary and typically bullish practice that decreases the circulating supply of a coin or token. Tokens are burned by sending them to a wallet address that cannot be accessed. This removes them from circulation or reduces the supply of that cryptocurrency. It operates on the principle of requiring miners to burn tokens to be granted the right to mine for the blockchain and receive a reward. Using this process, there is no competitive mining, which is what causes the PoW system Bitcoin uses to consume so much energy. Additionally, by reducing the circulating supply of a portion of the circulation of a cryptocurrency like the XRP example we discussed above, the number of transactions gets equally reduced.

Making dApps easier to build across multiple chains, ICON is paving the way for an interconnected blockchain space. With Ledger, you can access the ICON ecosystem with the peace of mind that comes with security and self-custody. Staked ICX tokens give holders the right to vote on important decisions that affect the network, like protocol upgrades or new feature implementations. ICX holders can stake their tokens to participate in the network’s governance and earn rewards. Developers can use GMP to send messages between different blockchains without needing to understand all the technical details of how each blockchain works. Central to ICON’s ability to connect different blockchains is its cross-chain framework.

This method is used for tokens such as Shiba Inu, Ethereum, and many more. The token burn event contributed to the increased scarcity of SHIB and its potential for a significant price increase in the future. This is a technical process, but it essentially entails telling the smart contract the number of coins they want to burn. The smart contract will then verify that they have enough coins in their wallets and subsequently executes the burn.

As you often see in cryptocurrency, it has been copied almost endlessly since then. To experience token burning firsthand, you’ll need to acquire cryptocurrency with compatible burning mechanisms. Specific projects acting in full transparency should make the wallet address used for a coin burn available to all users on an official website, social media profile, or Discord community. Tokens are sent to a burn address that is purposely inaccessible to users and project owners alike.