The crypto industry largely operates on some basic laws of economics, just like any other market-driven industry out there. One of those basic laws of economics applicable in this industry is the law of demand and supply. This law explains how demand and supply can positively or negatively influence prices. Market strategists have been known to maximize the knowledge of this law to drive price, and cryptocurrency is no different.
Token burning is one of the unique ways market strategists in the crypto industry drive prices using the law of demand and supply. The availability of a token will always impact its value, and when a token is burnt properly, there can be significant returns in gains.
So, what is crypto burning? How exactly does it work? What are the implications? I’m sure these questions and many more are already running through your mind. Well, not to worry. I will provide clear and concise answers to these and much more as we look into token burning in crypto.
What is Token Burning?
Token burning is a special technique used in the crypto industry to increase the price of a crypto asset by controlling its supply. In this process, crypto tokens are transferred into a wallet without private keys. The goal of this act is to limit the available amount of tokens that can be supplied simply by rendering some of the tokens inaccessible. If the demand for the token remains constant or increases, its price is believed to increase.
It takes a community effort to successfully embark on crypto burning and get the desired result. The summative effect of different individual token holders burning a small number of their tokens is a significant drop in supply which then drives an increase in price. It is very common to see popular crypto holders encourage a community to burn tokens from time to time to drive price. Likewise, it can also occur steadily across a long period of time as with Ethereum which burns a bit of its token with every transaction.
How Does Crypto Burning Work?
There are a couple of ways to go about token burning in crypto. The more popular method is to send the token to a crypto wallet without private keys. This type of crypto wallet address is also known as “burner” or “eater” address. With this, the tokens are no longer accessible and they are classified as destroyed. This is why it is advisable that you double-check the amount being burnt before sending it to a burner wallet.
Another method of burning crypto adopted by slime crypto companies is to establish their own burn systems. Shiba Inu adopted this method in April 2022 by setting up a burn portal for burning SHIB tokens. A burn function could also be created to help in burning assets. Binance Coin is known to have this function which allows holders to burn tokens by simply stating the number of coins they wish to destroy. The coins are substrate from their wallet after which Binance Coin updates the amount of count still accessible.
Application of Token Burning
While the predominant reason for burning crypto tokens is to increase its value, there are other applications of token burning. Here are some of the other prominent applications of token burning.
- Increase value
We cannot speak about the application without fully expatiating on how it can be used to increase the value of the token. The average price per coin tends to increase maximally after a large burn and while this is due to limited supply, other factors help as well. One of such factors is publicity. Since token burning is largely dependent on the community, coordination of the activity through social media is quite key. It helps in promoting awareness and increase demand which will in turn increase value.
- Proof of Burn
Proof of Burn (PoB) is the central part of the token burning process. It is a consensus mechanism that aids the verification and validation of any burn transaction. It is actively utilized by miners to burn coins effectively without wasting energy. Another practical use for PoB is for the prevention of fraudulent activities by verifying every transaction.
- Promote mining balance
With every new token that is created, there is a reduction in mining speed. This is why early miners and adopters have a strong edge over other new users. The early miners can now have the right to mine new tokens thanks to token burning. A healthy network for activity is built as miners don’t have to burn the same token they are mining.
Pros and Cons of Token Burning
- Strengthens crypto communities
Token burning is usually driven and sustained by the activity of communities. Successful token-burning initiatives tend to attract new investors to get involved with your project. This is what makes some of the more popular altcoins very successful in the crypto market.
- Maintains coin value for investors
Successful token-burning exercises help to stabilize the price of assets and boost the morale and confidence of your investors. The increased price of the token helps investors accrue more financial gains. This keeps everyone happy with the project while smiling to the bank.
- Loss of assets
A token-burning exercise gone wrong can spell big disappointment for all players in the project. Tokens burnt are irrevocable which means when they are burnt, they are lost forever. Burning huge amounts of tokens at the same time can be detrimental if you don’t have enough tokens to consolidate on when the price increases. Mistakes when burning tokens can also be very problematic as the process cannot be reversed.
- Significant volume needed
To facilitate sufficient movement in the market to increase the price of a token, a large amount of token burning is needed. If the amount burned is not sufficient, there will be little or no impact on the price leaving investors at a loss. the larger the amount of a coin in circulation, the larger the amount to be burnt to have a significant impact on supply and price.
Examples of Token Burning
There have been some successful token-burning exercises in the last 14 years in the crypto space. An estimated 4 million bitcoins have been bunt over the years and a couple of top crypto companies have been known to make use of this method often. This includes Binance Coin, Ethereum, and Shiba Inu.
- Binance Coin
Binance Coin (BNB) operates using an auto-burn technique which reduces the total number of available coins quarterly. The first of its auto-burn actions took place in October 2017 and 0.49% of its entire supply was destroyed in the exercise. Binance Coin also burns a portion of the gas fees for transactions on the Binance Smart Chain alongside the auto-burn. The automatic system of this burning keeps investors at peace because investors won’t need to worry about losing a huge number of their assets at the same time.
The EIP-1159 came on board in 2021 after which Ethereum restructured its fee model and began to burn Ether with every transaction. The amount of Ether to be burned varies depending on the demand for block space. Through this regulated method, Ethereum has been able to burn over 2 million Ether and the number keeps rising daily. Ethereum 2.0 is still in the works and it is expected to come with an upgrade which will increase the number of Ether burnt with every transaction.
- Shiba Inu
It will be hard to talk about crypto projects that have made the most of token burning without mentioning Shiba Inu (SHIB). The crypto project has been known over the years for taking on large token burn exercises. It introduced the burn portal in April 2022 with which it encouraged investors to burn coins. Its greatest token-burning exercises however came just a year after the coin was launched. The creators sent 50% of the total SHIB supply to Vitalin Buterin (Ethereum cofounder) who in turn burnt over 400 trillion SHIB.
Token burning is a valuable technique that can be used to increase the price of a token when done properly. Burning exercises are community-driven so ensure that you have credible information when embarking on a burning exercise to avoid losing out. If done properly and with the right community, token burning can help you gain massively on those assets in your hands. With this, you have all the basic info you need about token burning in the crypto market and you can be confident when next you plan to embark on a token-burning exercise.