With the advent of so many new tokens emerging, one would expect the cryptocurrency community to contain many tokens with little to no value, but with the help of token burning, that’s not the case. Burning tokens is a not-so-new concept that has become popular in the crypto community, and new users are interested in it.
Burning cryptocurrency is a popular method of boosting the value of a coin or token. Token burning removes coins from circulation, permanently decreasing the overall supply of the cryptocurrency. This is typically done by transferring the tokens in question to a burn address, i.e. a wallet from which they cannot ever be retrieved. This is often described as destroying tokens.
A project burns its tokens to reduce the overall supply. In other words, it creates a “deflationary” event. The motivation is often to increase the value of the remaining tokens since assets tend to rise in price whenever the circulating supply falls and they become more scarce.
Burning tokens can be similar to a company buying back its shares. The company “returns the value” to its shareholders in this way. Crypto projects burn their tokens to achieve the same goal. The price of the token does not drastically skyrocket overnight when the burn takes place. Sometimes, other news about the token can overwhelm the impact. Alternatively, investors may know a token burn is going to happen and “price it in” at an earlier point. Even so, in the long run, burning tokens tend to support an asset’s price and is considered a positive move.
Benefits of burning crypto
The following are the advantages of burning crypto:
Boosting coin’s price: The value of tokens could go up when some are removed from circulation because there is less supply. Not all cryptocurrencies have a maximum amount, so crypto burning may affect values differently. For coins like Bitcoin, there can only be 21 million ever created. . The Ethereum blockchain uses the burn mechanism to merge miners to its new proof-of-stake network.
Consensus mechanism: removing tokens from circulation adjusts availability naturally. however, it requires crypto miners to burn coins to mine new blocks on a blockchain. Another way to put it is miners have to spend a little money to make more money. Some blockchains leverage crypto burning to take other tokens out of circulation. For example, mining a new specific coin may require a miner to burn Bitcoin.
Maintaining of algorithm stablecoins: One of the most significant use cases for crypto burning is to keep algorithmic stablecoins actually stable. Stablecoins often burn tokens to maintain their dollar-pegged value. When a stablecoin’s demand increases and the price begins to fall below the dollar amount, the protocol’s smart contract automatically will either burn coins to drive the price up or release new tokens to attempt to balance out the price.
Although, Sometimes burning crypto has little or no impact on a token’s value, and scammers have often used masked burning events to attempt to steal crypto from investors.
Curbing Inflation
Burning tokens’ most significant advantage is that it helps curb inflation. When there are more tokens in circulation, the value of the cryptocurrency can decrease due to the oversupply. Burning tokens remove a certain number of tokens from circulation, which helps to maintain the value of the remaining tokens and prevents the asset from losing value
Downsides of Crypto burning
While burning tokens can potentially drive up the value of cryptocurrency, there are also disadvantages of burning tokens:
Permanent Removal of Assets
One of the major drawbacks of burning tokens is that the coins are permanently jettisoned from circulation. If the cryptocurrency has a fixed supply and starts to experience a significant increase in demand in the future, the reduced circulating supply may limit its ability to meet that demand, leading to missed opportunities for the asset.
Large Quantities Needed to Make an Impact
Another issue with burning tokens is that you need to remove a significant number of tokens from circulation to have a noticeable impact on the asset’s market value. This can be difficult to achieve, especially for projects with a limited supply and those without a large supply of tokens, or an active community to drive publicit
Conclusively, token burn is a unique way to increase the price of a crypto asset. It works on the fundamental principle of the law of supply and demand. While there is no guarantee that Token burning will surely increase the price, one should always do a thorough analysis of previous burns made while considering burning a specific token. Users should exercise caution while sending tokens to addresses without private keys as once a token is burnt, it is lost forever.