What is token burning and why is it done?

Cryptocurrencies usually have a massive supply of coins. Though it may already be limited, some coins are burned to maintain their impressive value. This way, they can have a better balance when it comes to maintaining the law of supply and demand. 

With an innovative process called token burning, crypto companies discovered that there are times when the coins they have created need to be sacrificed. This works similarly to how some companies buy back their shares or absorb the cost of their stocks. 

This process is deemed necessary in some cases when it comes to digital assets. With that, here is a quick understanding of what burning token is all about: 

What is token burning? 

Token burning pertains to the process of removing coins from a crypto’s overall supply. This is done in such a way that the coins will be sent to inactive, lost, or invalid wallets. Since these wallets can still receive coins, they are the most ideal place to store burnt tokens. 

This process is usually done on a wide scale. There are times that influencers will encourage a community burn where everyone will send a small portion of their savings to a burn address. In return, they will enjoy the difference in the overall number of coins in circulation and their value as well. 

How token burning works 

As crypto’s value somehow works with a supply and demand relationship, it can be said that crypto token burning is a great way to keep the balance in check. When there are lesser assets available, the higher the demand gets. This will drive an increase in how the specific coin is being valued. 

Simply put, a token’s increased scarcity will move the price upward. Still, its effect on the prices don’t take place immediately unlike how other people see it. 

Token burns can be held regularly or just when it’s deemed necessary. This is because this isn’t the only factor that dictates how much a coin is valued. For example, positive news about a certain coin may already be enough to drive its value up, thus removing the need to burn some coins. 

Token burning depends on what people think is needed. As it is most commonly used to increase a coin’s price, some do it to keep a token pegged at a certain price. In this manner, the tokens will be burnt when the price is low. This will reduce the supply and will match the demand better. 

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Why burn tokens in crypto? 

There are several reasons why people engage in token burning crypto activities aside from just driving a coin’s price up. Here are some of them:  

For Proof-of-Burn (PoB)

PoB is one of the consensus mechanism algorithms that are implemented by a blockchain network to ensure that all nodes are true. This allows miners to burn coins without wasting energy. It’s also a way to keep the network active. It can be verified with a blockchain explorer if needed. 

With this, people are allowed to burn native coins or something from an alternate chain. Those who do it will receive a reward in the blockchain’s native currency token. 

To promote mining balance 

Mining speed is reduced every time a new token is created. This in turn gives an unfair advantage to early miners since they have more rights to mine new tokens. However, it is by burning token in crypto that the mining field is made fair for both old and new miners. 

In some cases, miners no longer have to burn the tokens they’ve mined. The reason behind this is that PoB is customizable and can provide miners with rewards. This therefore works as a way to keep all network activities healthy. 

To stabilize economic moves

Most of the time, not all tokens in Initial Coin Offering (ICO) events get sold. Developers saw that burning is one way to get rid of the unsold ones. This way, the value of the sold tokens will increase, making it more convenient for those who bought them. It will also be helpful in showing the commitment of the developers in allowing their projects to grow. 

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Pros and cons of token burning 

The entire process of burning coins has several advantages and disadvantages to it. Here’s what people should learn more about: 

Pros 

• Keeps a stable value of coins →  By burning coins every once in a while, coins are more likely to be stable in terms of their value. This will make them in demand for a long time.
• Makes the crypto community stronger → As investors actively engage in burning coins to drive its value together, the crypto community becomes stronger. This makes it more appealing for people who have yet invested. 
   

Cons 

The main disadvantage of burning tokens is that they would mean a permanent loss of assets. Whether they will skyrocket in terms of value or not, there is no way of getting it back. Therefore, the decision can be regretful since every crypto transaction can’t be retracted. 

Examples of token burning 

There are several cryptocurrencies that practice crypto burning. Here are some of them: 

• Ethereum (ETH) →  With its EIP-1159 upgrade, their fee model was changed and they started to burn Ether in every transaction. Over 2 million ETH were already burned and it continues to increase per day.
• Shiba Inu (SHIB) → This coin is mostly known for its large token burns that are made through their burn portal which was just introduced in 2022. Since the founders have sent half of their supply to Vitalik Buterin, Buterin has also burned over 400 trillion of SHIB. This is aside from what he donated to charity.
• Binance Coin (BCB) → This coin is known for its auto-burn that reduces the number of their coins in circulation. Aside from the auto-burn, BCB also burns a part of the gas fees charged per transaction.
   

These are just some facts that people would have to learn about token burning and what makes it essential in the industry. By learning about its practicality, users can be more eager to sacrifice some of their assets to see their crypto thrive. 

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Words: Kyra Jimenez