What is a Token Burn? How Crypto is Removed From Circulation

26 Aug What is a Token Burn? How Crypto is Removed From Circulation

Token burning can be compared to stock buyback in the equities market. Some companies repurchase their shares from investors from time to time. Apple has done it for a while, eBay does it, and Twitter agreed to do it as part of a settlement with what is burning crypto hedge fund Elliott Management. Tokens sent to a burn wallet are permanently removed and can’t be retrieved.

Impact of token burns on crypto

Burning can also be performed by crypto miners, who are usually responsible for putting crypto coins into circulation in the first place. This is because the burning process is also related to the Proof of Burn https://www.xcritical.com/ (or PoB) mechanism. Coin burning is what happens when a coin needs to be taken out of circulation so that it can no longer be bought, sold, staked, or used at all. Any cryptocurrency can be burned, regardless of its supply or value. However, this isn’t something that happens to every coin out there. Sending a token to a burn address effectively removes the digital asset from its overall supply, locking it up in the hands of nobody and preventing the asset from ever being traded again.

Characteristics of a Burn Wallet

Simply that we acknowledge this very interesting concept, where ownership means the ability to both create and destroy. It is part of a broader story in which control in various forms is being passed back to people. This will surely give rise to some interesting, useful and thought-provoking blockchain developments for those who understand its utility. Here, we explain the practice of token burning, its various use cases within the crypto ecosystem, and  dynamics to be aware of.

The Current Binance Burn Function

The amount destroyed represented about 50% of the SHIB token supply. At the heart of this framework is ICON’s General Message Passing (xCall) interface, which standardizes and simplifies the process of sending data across different blockchains. We will take a closer look at this interface in the sections below. Different blockchains offer unique features and capabilities, but they often exist in isolation, unable to communicate with each other. Cross-chain development is essential to breaking down these barriers, enabling dApps to interact with various blockchain ecosystems, share data, and transfer assets securely and efficiently.

Align incentives with token holders

If you own an NFT you have the option to essentially burn it in exchange it for an ASH token. In doing so, you’ll not only get a stake in ASH, you’ll also decrease the supply of that NFT collection This pushes the value of the collection up as a whole (at least in theory). So the project poses some pretty deep questions about the value of art, the value of money and your personal values. Token burning means destroying a coin or token permanently – but why do this? Coin burning is one common strategy that has emerged to influence tokenomics and counteract some of these downsides, while attempting to increase its scarcity and value. Past performance is not a guarantee or predictor of future performance.

Does Coin Burning Increase Price?

• It decreases supply, theoretically increasing demand and, thus, prices.
• And it is another key example of how token burning can be utilised to control crypto value.
• It helps combat inflation risk and creates an environment for the value of the remaining tokens to appreciate.
• All transactions to the burn wallet are recorded on the blockchain, ensuring complete transparency and allowing anyone to verify the number of tokens burned.
• Token burns contribute to a more stable supply, which in turn promotes market stability.

In a nutshell, a reduction in volume lowers the chances of spam attack which leaves enough bandwidth for health transaction count on the network. Even stablecoins like USDT and USDC have conducted burns of over $2.8 billion. This provides transparency of the reserves once funds are added or retired.

How to Access and Use ICON (ICX) Securely

If you execute the burn function to burn your coins, they will be destroyed forever. It’s impossible to recover coins after they are burned, and thanks to blockchain technology, the proof of burn can be easily verified on a blockchain explorer. “Some blockchains even have a built-in mechanism integrated into the protocol that burns the tokens when necessary,” Cerba said. And it is another key example of how token burning can be utilised to control crypto value. The higher the demand for a given asset, generally the higher its value.

SHIB community reduced circulating tokens

This creates new private keys that belong to the burner wallet—no one has these keys, so the coins become inaccessible. This is usually compared to burning physical forms of money, which is why it is called burning. From the community angle, you could argue that token burns are a form of airdrop due to the value of community holders’ tokens increasing.

The company has burnt around $60 million in BNB tokens since the inception of the Quarterly burns. Now let’s take a look at an example of a coin burn, where we burn an NFT (ERC-721 token) on Etherscan. Notable projects employing POB include Slimcoin (SLM), Counterparty (XCP), and Factom (FCT), while some coins use a combination of PoS and POB for token issuance and maintenance.

This allows developers to create dApps on-chain that operate with minimal latency, making them fast and responsive. This execution environment is ideal for building cross-chain dApps, where speed and performance are crucial. For instance, Binance has a target of burning 100 million BNB tokens, while there are similar practises for both USDT Tokens (issued by Tether) and XRP coins (issued by Ripple). Binance completed its 21st BNB burn in October 2022, which includes the auto-burn feature, pioneer burn program, and a portion of gas fees burned in every transaction. One useful indicator of how burning can affect price comes from Bitcoin Cash. In April 2018, a miner working within the mining pool Antpool revealed that 12 percent of the Bitcoin Cash it mines would be sent to unobtainable addresses.

In this method, the project buys back tokens from the open market and then burns them. This can be seen as a way to reinvest in the project and directly impact the token’s market dynamics by reducing the supply. The aim here is to reassure potential investors that the future supply of the token will continue to shrink, calming concerns of inflation or an overly diluted market. As a result, this practice can also add to the appeal of a token as a “store of value.”

By burning tokens, projects can reduce the circulating supply, which helps to control inflation and maintain a stable value. This is particularly important for projects with a long-term vision and those aiming to establish their tokens as a reliable store of value. Some blockchain projects have automatic burning mechanisms built into their protocols.

Developers also burn tokens as a way to hide whales who hold large portions of a cryptocurrency. Let’s say a developer launches a cryptocurrency with 1 billion tokens, keeps 100 million, and immediately burns 600 million. It will look like the developer owns 10% of the supply because the original supply was 1 billion. But the developer really owns 25% of the 400 million tokens still in circulation, which is obviously a much larger amount.

The aim of burning tokens is to increase scarcity with a supply-demand imbalance that may increase the token’s value over time, although this is never a guaranteed outcome. Transparency and trust are crucial in the cryptocurrency world, where regulatory frameworks are still evolving and market volatility is high. Token burns are a transparent way for projects to demonstrate their commitment to responsibly managing the token supply.

But in December 2021, Binance announced that the Quarterly Burn would be replaced by the new BNB Auto-Burn. In practice, the deflationary tactic has produced other favorable outcomes. That’s a great question – and the answer can be found with a quick recap of the dynamics of supply and demand. Moreover, if the burn is substantial and information about it is known beforehand, the market might factor it in well in advance, potentially causing an uptrend before the actual burn. PoB combines elements from Proof of Work (PoW) and Proof of Stake (PoS), and is regarded as an experimental algorithm to achieve energy efficiency. Some examples of cryptocurrencies using PoB are Namecoin and Slimcoin.

As we’ve seen, having full control over a token supply means some interesting new vectors for creativity, problem-solving and personal autonomy. There are also some new things to be aware of as a user when sizing up a new project. Algorithmic stablecoins seek to overcome this by creating coins of stable value via control of the supply. Among many revolutionary features, perhaps the most appealing aspect of cryptocurrency is the control it restores to users. The advantage of proof of burn is that it’s an efficient way to validate transactions and doesn’t have the energy requirements of the proof-of-work model.

The burning happens when the coins minted into the reserve are withdrawn, regulating the circulating supply and keeping the balance stable. Ripple, a top digital asset, also does this but uses a different method. It reduces the number of transactions allowed on its network, limiting the possibility of a DDoS attack (which disrupts the normal traffic of a service, server or network). Another way is by taking the fees used as “gas” to make a transaction happen faster than usual. This reduces the supply of XRP circulating in the market on every transaction done.

Here is your ten minute crash course on this key crypto concept – thanks School of Block. Since you need a private key to access the coins at a given address, this means no one will have access to coins in this wallet. A stock buyback is when the company that issued the stock buys shares back at the market price and reabsorbs them, reducing the number of total shares in the market. While buybacks and coin burning aren’t an exact match, they’re similar concepts that can serve the same goals.

This process called “rebasing” and is the foundation for a raft of stablecoin innovation in DeFi 2.0. Impacting value via supply is not a new concept, especially when it comes to finance. They entail on the company buying back some of their own stocks and shares from the market. You can think of token burning as the crypto version of a buy back – let’s have a look at this in action. If you keep up with cryptocurrency at all, it won’t take long to hear about coin burning, a method of cutting a coin’s supply that became popular around 2017.