“Burning crypto involves intentionally destroying digital tokens or coins, making them irrecoverable.
Despite seeming counterintuitive, some blockchain projects deliberately do this.
This article explores why burns happen, their impact on projects and investors, and provides insights for navigating this landscape.
It also examines notable burning events.
What is crypto burning?
To burn crypto means permanently removing cryptocurrency from circulation by sending it to an unspendable “burn address.
This scarcity increases the value, akin to limited edition items, as fewer coins are available, creating urgency among investors.
Understanding the reasons behind cryptocurrency burns
There are several reasons why burning takes place:
Increasing token value with scarcity
Cryptocurrency burns are a strategic move to stoke the value of a particular token by reducing its circulating supply.
When tokens are deliberately removed from circulation, scarcity is created, typically driving up demand for the remaining tokens.
This leads to an uptick in token value, thanks to the age-old dance of supply and demand.
Breathing new life into lackluster projects
Occasionally, crypto burns emerge as a lifeline for projects that have lost their spark or stalled.
A well-executed token burn can whip up a frenzy of excitement, catching the eye of investors and amplifying trading volume.
With fresh interest and support, projects can harness the momentum to push forward and realize their ambitions.
Reducing inflation and safeguarding stability
Cryptocurrency burns are vital in curbing inflation by shrinking the overall token supply.
Left unchecked, inflation can gnaw away at token value and destabilize prices.
Periodic token burns are like a well-timed jab, keeping inflation in check and preserving the project’s and its investors’ long-term prospects.
Leveling the playing field for distribution and governance
Token burns can also be a great equalizer, ensuring a more equitable distribution and governance within a decentralized project.
When a project accumulates tokens through fees or other means, incinerating those tokens stops the project’s team from hoarding the lion’s share.
This leads to a decentralization safeguard that hinders manipulation or control by any single party.
Impact of token burns on crypto
Let’s delve into the real-world implications of token burns and how they can shape cryptocurrency projects’ and investors’ trajectories.
Boosting investor confidence
Token burns show a project’s commitment to maintaining value, supporting growth, increasing investor trust, and attracting new supporters.
Projects actively managing token supply and combating inflation demonstrate their dedication to preserving investor value and bolstering investor confidence.
Improving market perception
When a project conducts a token burn, it often catches the attention of traders and investors, increasing trading volume and liquidity and ultimately helping the project regain its competitive edge.
Unlocking new opportunities
As the token value and market perception improve, other projects or organizations may take notice, opening doors for growth and expansion through collaboration or integration.
Encouraging long-term investment
Increased token value due to token burns may motivate investors to hold onto their tokens, fostering a healthier ecosystem.
Moreover, investors are more likely to contribute to a project’s growth through participation in governance or community activities, creating a more stable investor base and sustainable ecosystem.
Reinforcing good tokenomics practices
Token burns promote healthy tokenomics practices, contributing to a more robust and well-regulated cryptocurrency market.
As projects recognize the benefits of token burns, they may adopt similar strategies, fostering a more sustainable and successful future for the entire industry.
Proof-of-burn: a greener consensus algorithm
Proof-of-burn (POB) is an eco-friendly consensus algorithm in certain cryptocurrencies.
Miners prove their work by burning coins, increasing their chances to validate transactions.
Unlike proof-of-work (POW) and proof-of-stake (PoS), which prioritize power and stake, POB is energy-efficient and combats inflation.
Projects like Slimcoin, Counterparty, and Factom use POB, often combined with PoS, to maintain scarcity and boost long-term value.
How can you burn tokens?
Projects use smart contracts to burn tokens.
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.
The smart contract will send tokens to a randomly generated address that’s inaccessible.
Now let’s take a look at an example of a coin burn, where we burn an NFT (ERC-721 token) on Etherscan.
Here are the steps:
- Click the contract address of your NFT. This address should be available on the platform you minted the NFT. The address will open on Etherscan, a block explorer for Ethereum-based tokens.
- Next, go to the contract tab.
- Click “Write Contract.”
- Scroll down and go to the “Burn” option.
- Enter the address of the wallet holding the NFT in the first field.
- Copy the token ID from the NFT platform and paste it into the second field.
- Indicate the number of tokens you want to burn in the last field.
- Click “Write” to execute the burn transaction.
A coin burn is recorded as a transaction on the blockchain and is visible to everyone. It is also permanent and irreversible. So if you are going to try this, don’t do it with your favorite NFT.
Conclusion
Crypto burning has the potential to shape the future of the cryptocurrency world.
Its effects can be far-reaching and significantly impact the projects and investors involved.
Understanding token burns’ motivations and real-world implications is crucial for navigating this ever-evolving landscape.