Have you heard anyone talking about “burning” millions of crypto tokens? Did you wonder what they were discussing? When I first started exploring the cryptocurrency world I initially thought that it was strange – what kind of person would want to destroy their cash? However, as I delved deeper I came to realize that the burning of crypto is a fascinating idea that plays an essential function in how cryptos manage their value.
Table of Contents
- 1 What Does Burning Crypto Mean?
- 2 How Do You Burn Crypto?
- 3 What is the Crypto Burn Rate?
- 4 Why Burn Cryptocurrency? The Main Reasons
- 5 1. Potentially Increase Value
- 6 2. Combat Inflation
- 7 3. Proof-of-Burn Consensus
- 8 4. Community Value Return
- 9 Notable Crypto Burning Examples
- 10 The Potential Downsides and Risks
- 11 Potential for Manipulation
- 12 Hidden Whale Concentration
- 13 No Guaranteed Value Increase
- 14 Is Burning Crypto a Good Sign for Investors?
- 15 Final Thoughts on Cryptocurrency Burning
What Does Burning Crypto Mean?
What is crypto burning specifically? In essence, burning refers to the act of intentionally sending cryptocurrency tokens to a specific wallet address (called”burn address” or “eater account”) “burn address” or “eater address”) which are never accessed or utilized again. This is like dropping cash in an unending pit – after the tokens have been deposited and disappeared, they’re gone forever.
The address of the burn isn’t allocated to any person, and can’t be accessible by any person it serves primarily as an online black hole that houses cryptocurrency. If tokens are transferred to it the address is permanently taken out of circulation, thus reducing the amount of cryptocurrency’s supply.
When I first came across this idea, I thought that it was a fringe method. The reality is that burning crypto has become a hugely common thing since 2017. Developers of minor as well as major cryptocurrencies burning billions, millions or millions of coins.
How Do You Burn Crypto?
Anyone who has cryptocurrency can burn it off through an address for burning. However, let’s face it – you shouldn’t burn your cryptocurrency except if you don’t like throwing it out! The process of burning is generally performed by the creators or the creators of cryptocurrency in their tokenomics plan.
The process of burning is different depending on the specific blockchain however, the general process is as follows:
- Tokens are issued to a verified inaccessible address (often an address without a public key)
- The transactions are verified, and saved on the blockchain
- The total supply of cryptocurrency diminishes
- They cannot be used or redeemed
Certain cryptocurrencies even have automated burning features in their protocols. This is where a part of the transaction fee and other transactions cause token burning regularly.
What is the Crypto Burn Rate?
The term “crypto burn rate” is the speed of the rate at which coins are destroyed. The rate can be calculated by various methods – the number of the amount of tokens burned each day in transactions, daily, or in specific events of burning.
In this case, Binance Coin (BNB) has been implementing a quarterly burning plan since 2017. In 2017, they utilized 20% of their earnings to pay back their customers and sell BNB. The goal is eventually to eliminate 50% of their BNB total BNB supply. The regular and predictable burning rate provides investors with an understanding of how the quantity of BNB will fluctuate over time.
Some projects may offer different burn rates. The DeFi protocol may use tokens to burn based on transaction volume. This means the rate of burn fluctuates with the amount of usage. The knowledge of the project’s burn rate will help you determine the speed at which the supply decreases.
Why Burn Cryptocurrency? The Main Reasons
When I learned about what burnt crypto was and what it means, my next concern was: “But WHY?” It turns out that there are a variety of strategic motives for crypto projects to burn tokens.
1. Potentially Increase Value
The most important point. By reducing the amount of cryptocurrency, the burning could increase the scarcity that could cause the price to rise. In simple economics, If demand is constant and supply is reduced, prices tend to increase.
I’ve seen this unfold numerous times throughout the marketplace. When a startup declares that it will be burning a large amount of tokens the result is usually optimism in the eyes of investors. However, it is important to note the fact that burning does not guarantee a price rise as market dynamics can be complicated, and a variety of factors influence the value of tokens.
2. Combat Inflation
Certain cryptocurrencies are created with an inflationary structure, which means that the creation of new coins is constantly by mining or stake rewards. The burning process can offset the rising inflation by eliminating tokens from circulation and ensuring an equilibrium in price.
3. Proof-of-Burn Consensus
It was an interesting finding for me: Certain blockchain companies utilize token burning to create their mechanism for consensus! It is known as “Proof-of-Burn,” this approach will require miners to burn a portion of their tokens to gain the ability to create blocks. The more tokens they consume, the greater mining power they earn.
In contrast to the energy-intensive Proof-of-Work system, Proof-of-Burn is an eco-friendly verification method that still requires miners to forfeit something worthless (their tokens) for the privilege of participating.
4. Community Value Return
Certain projects burn their tokens for them to provide value back to their communities. Instead of making dividends (which can trigger issues with regulatory authorities) in addition, they decrease the amount of tokens available, which could benefit everyone who owns tokens through an increase in supply.
Notable Crypto Burning Examples
Let me present some of the most fascinating blockchain cryptos I’ve encountered:
- Binance Coin (BNB) as mentioned previously, Binance has been conducting annual burns every quarter since the year 2017. hoping to eventually burn 50 percent of BNB tokens. The regular schedule of burning has been widely anticipated within the crypto calendar.
- Stellar (XLM): In 2019 The Stellar Development Foundation made headlines through the burning of more than 55 billion XLM tokens. That’s nearly half the entire amount! The massive, one-time fire significantly reduced Stellar’s supply in a single day.
- Shiba Inu (SHIB): This could be among the most popular burning stories. The creators of the SHIB tokens gave 50 percent of the SHIB amount to Ethereum founder Vitalik Buterin, presumably as a promotional campaign. It was a surprise that Buterin burnt 90% of these tokens (worth billions of dollars at the time) and then donated the remaining to charities.
The Potential Downsides and Risks
Though burning crypto may appear to be a great idea there are downsides and dangers to be mindful of
Potential for Manipulation
However, it’s possible that token burning could occasionally be used to generate illusions. Some less reputable companies may announce burning to create excitement and increase pump prices but in actuality, they’re transfers of tokens to wallets they own, yet claim they are burn addresses.
I’ve witnessed this happening in multiple instances in the more remote corners of the cryptocurrency market. Make sure you verify the burn addresses as well as transactions whenever a crypto project declares a major burn.
Hidden Whale Concentration
A different issue is the use of burns to conceal the concentration of tokens. Imagine a company creates one billion tokens, then keeps 100 million to themselves, and then burns 600 million. They may claim to own only 10% of the quantity, but they own about 25% of the circulated supply, which is a greater percentage.
The kind of manipulation that affects supply could pose a hidden risk to investors who believe ownership is distributed more as it is.
No Guaranteed Value Increase
Contrary to the theory of economics it isn’t a guarantee that burning tokens will boost the value of cryptocurrencies. Utility, market sentiment as well as competition and many other elements all affect the prices beyond supply fluctuations.
Is Burning Crypto a Good Sign for Investors?
If you’ve been able to understand what the term “burning crypto” means it is possible to ask if can it be a good indication to investors. My opinion is that it might be, but the context is crucially important.
Token burns which are an integral part of a transparent open and well-communicated plan for tokenomics generally show that the company is committed to providing long-term value to the holders. Burns that are regular and have clear goals like Binance’s quarterly burnings are generally viewed favorably by market participants.
However, unprovoked or unidentified burning, particularly from recent projects, needs to be examined closely. Many projects employ dramatic burning announcements mostly as marketing strategies instead of solid economic strategies.
It is important to go beyond the burn in itself and focus on the underlying issues of the concept. An excellent cryptocurrency won’t go poor by burning tokens. Likewise, a bad one doesn’t get better by burning tokens.
Final Thoughts on Cryptocurrency Burning
Knowing about burning crypto has helped me become a better investor. As I review a cryptocurrency project I consider the way they manage supply during my study.
If you’re looking to invest in crypto you should pay particular attention to the burn mechanism and their schedules as they could have a significant impact on the world of tokenomics. Be aware to keep in mind that token burn is only part of the overall picture and should be taken into consideration in conjunction with other factors such as utility, the rate of adoption, development activities as well as team trustworthiness.
No matter, if you’re a veteran investor or are just beginning to get started with crypto, knowing about methods like burning, will aid you in navigating this complicated world with greater assurance. Like everything else that’s happening in crypto make sure to conduct the necessary research before investing.
What are your opinions on burn mechanisms for crypto? Are you a part of any companies that offer interesting burn mechanisms? Be aware that although burning could play a significant role in the economics of cryptocurrencies however it’s not the primary reason to make investing decisions.
