Among the more unique concepts in the cryptocurrency markets is ‘coin burning’, alternatively titled ‘token burning’. A wide variety of coins and tokens have adopted this process into their systems. Going by the name, one would get an image of legit coin burning; something hardcore, so to speak. While this isn’t the case, coin burning is still a vital mechanism. As a matter of fact, it’s a process that has the potential to be a popular feature for future cryptocurrency projects. A large number of Initial Coin Offerings (ICOs) are integrating a coin burning mechanism into their operations. Specifically for tokens that don’t sell at the end of their token sale.
On top of all this, major exchanges that have their own native tokens, like Binance, also adopt a periodic token burning mechanism. The main reason for this is so that they can add value to those who are holding Binance Coin (BNB).
So, how does coin burning work if the coins themselves are not physical? This article will answer that question by going into detail about this process and what it entails.
What exactly is it?
Token burning is indicative of the permanent removal of pre-existing cryptocurrency coins from distribution. There are multiple purposes of this procedure, with some typically being:
- For creating new tokens or coins (‘proof-of-burn’)
- As a means to reward the holders of the token or coin
- A way to destroy tokens or coins that did not sell following an ICO or token sale
The overall practice of this kind of burning is becoming very common in the industry. Moreover, it is quite straightforward. Token burning is an intentional action that the coin’s creators carry out in order to “burn” – or remove – coins or tokens. The specific amount they remove will be from the total that is currently available in existence. To reiterate, there are plenty of reasons to burn tokens. However, the process is generally for deflationary purposes.
Some of the larger blockchains, such as Bitcoin and Ethereum, do not usually employ the use of this mechanism. Despite this, altcoins often use burning, as do smaller tokens. Their intent is to control the number that is in distribution, thus providing greater incentives to investors.
Burning is a unique procedure for cryptocurrency because regular fiat currencies are not “burned” per se. This is despite the fact that the flow of available currency is otherwise monitored. Token burning is quite similar to the notion of share buybacks by publicly-owned corporations. These reduce the total amount of stock that is accessible.
Be that as it may, token burning possesses several unique applications and serves various purposes.
How does it work?
As straightforward as the concept is, it is possible to accomplish token burning in a variety of ways. Whatever the strategy is, the main objective is ultimately to reduce the existing number of tokens that are available.
Despite the extremity that comes from the name alone, burning tokens does not involve any kind of disintegration. At least not in the literal sense. However, the process does render them completely unusable and worthless in the future. For this procedure to work out properly, the project’s developers need to repurchase or take available currency out of circulation. They do this by effectively removing them from availability.
In order to carry this out, the tokens’ signatures are put into a public wallet that is irretrievable. This particular wallet goes by the name of ‘eater address’. It is viewable by all nodes but nevertheless is perma-frozen. The status of these coins will later undergo a publication on the blockchain.
Different methods for different cryptos
There are different ways in which one can go about burning tokens. Moreover, there’s an array of projects that utilize these different methods in ways that are advantageous for their respective functionalities. In the end, it depends entirely on the purpose of the process.
There are some that will employ a one-time burn upon the completion of its ICO. They do this so that they can remove from circulation any tokens that didn’t sell as an incentive for participants. Others opt to regularly burn coins at either fixed or variable intervals and volumes. A notable example of this is the popular global cryptocurrency exchange, Binance. This platform burns tokens quarterly as part of a commitment to burn 100 million BNB tokens. The volume of coins alternates going off of the total number of trades that perform on the platform each quarter.
Ripple and various other systems will burn tokens progressively with each transaction. Every time parties transact through XRP, one party is able to establish a fee at its convenience. Doing so will allow them to prioritize the execution. However, there is no return of those fees to any central authority. Instead, they will undergo burning by way of sending them to an eater address as soon as the transaction clears.
Various stablecoins, like Tether (USDT), will conjure up tokens whenever they deposit funds into their reserves. Moreover, when they burn the equivalent amount as funds experience extraction or a withdraw. It doesn’t matter what the mechanism is; the outcome will always be the same. Tokens that are burned become unusable and will be erased from distribution.
The benefits of burning
On the surface, it looks like the fundamental design of token burns is strictly for giving projects an edge. That is not entirely the case. In reality, the mechanism is beneficial for developers and investors alike. There are several cases where burning tokens can aid in stabilizing a coin’s value and also repress potential price inflation.
The stability provides investors with a greater incentive to carry the coins, as well as keep prices at favourable rates. Therefore, it keeps network uptime and maintains a healthy bandwidth. Moreover, token burns emit a strong sense of confidence and reliability, most notably at the early stages of coin development.
An additional reason as to why projects burn unsold tokens after ICOs is to offer investors stronger transparency. A company that successfully sells tokens that are undistributed on an exchange may go on to gain an additional profit. However, it could make itself susceptible to allegations that it exists for profits alone. Be that as it may, the assurance that projects will use the raised funds solely for business operations illustrates a promise to investors. On top of that, it shows that they value their tokens at a fairer price.
All in all, coin/token burning is an innovative approach in a protocol or policy level for cryptocurrency projects to take into consideration. There are a variety of implementations and features that are up for adoption that can add to the process’s benefits. The advantages of coin burning mechanism integration are enormous.