One of the mechanisms that algorithmic stablecoins use to manage their prices is coin burning. When the price of the stablecoin is above the target price, it means there is an excess supply of the stablecoin in the market. To reduce the supply and bring the price back down to the target, the algorithmic stablecoin initiates a coin-burning mechanism. Token burning typically involves a smart contract or protocol mechanism that identifies and removes a specific number of tokens from circulation. The tokens are sent to an address with no keys, meaning no one can access the tokens.
We’re not suggesting you burn your favorite Bored Ape just yet, of course! 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. There are several ways to reduce the risk of falling for a scam in the crypto space.
Tokenomics: What is Token Burning?
This increases demand simply because there would be fewer available units attached to a specified good or service. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained https://www.xcritical.com/ herein. As of the date this article was written, the author owns Bitcoin and Ripple. Essentially, all of this burning activity keeps the network agile, and participants are rewarded for their activities (both burning their coins and the coins of others). Algorithmic stablecoins seek to overcome this by creating coins of stable value via control of the supply.
Some blockchains use crypto burning as a consensus mechanism, which 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.
Why Burn Crypto Coins?
In addition, some BNB holders who have lost tokens by mistakenly sending them to the wrong address can count them towards the burn and receive reimbursement under the BNB Pioneer Program. Each transaction between cryptocurrency wallets is recorded permanently on the blockchain. This mechanism is designed to help stabilize the BNB price, adding value to the coin by making its supply more predictable and its burning process more transparent. The function of the auto-burn process relies on certain predetermined factors. 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. While SHIB has a loyal cadre of investors, some question the merits of the SHIB coin burning.
Coin burning on its own doesn’t tell you whether a cryptocurrency is a good investment. By knowing how coin burning works, you can better understand the cryptocurrencies that use it. Developers can claim to burn tokens when they’re actually sending those tokens to a wallet they control.
How Does Burning Crypto Work?
This can create a sense of scarcity, which can attract more investors to the project and drive up the token price. One of the major drawbacks of burning tokens is that the coins are permanently removed from circulation. One of the most significant use cases for crypto burning is to keep algorithmic stablecoins actually stable.
There is also voluntary token burning, where holders take the initiative to send tokens to a burn address, permanently removing them from circulation. As an incentive to encourage users to burn tokens, some protocols offer users rewards, such as a share of transaction fees. Coin burning is an intentional and permanent removal of coins or tokens from the cryptocurrency‘s total circulating supply by sending them to a burn address permanently so that they cannot be retrieved. Reducing the number of coins or tokens in circulation is deflationary to the overall fixed supply, as no more are created after the total is reached. The value of tokens could go up when some are removed from circulation because there is less supply.
What Is Cryptocurrency Coin Burning?
Another reason to burn tokens is to remove unspent or inactive tokens from circulation to help streamline the blockchain network’s functionality. Burning inactive tokens can reduce https://www.xcritical.com/blog/what-does-burning-crypto-mean-cryptocurrency-burning-definition/ network congestion and improve processing times. Burning cryptocurrency means permanently taking a digital asset, such as Bitcoin (BTC) or Ethereum (ETH), out of circulation.
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. 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. As an experiment, Eidoo decided that, following its initial coin offering (ICO), it would first burn any unsold tokens, and then burn more tokens once it began generating revenue. If this is allowed to perpetuate, we will witness a burst of useful and thought-provoking Web3 projects engage in a race to understand tokenomics design. The free market will have plenty of options to choose from, and it should be exciting as people vote with their wallets.