#Crypto burning #Crypto #PoW
Nobody likes to feel unwanted, but in the crypto, it's sometimes necessary. The limited supply of a token is a key factor in its value, which is why tokens are occasionally burned to reduce the circulating supply—a process known as crypto burning.
However, this process often raises concerns among traders, who worry about the long-term sustainability of coins, especially those with a large number of circulating tokens.
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This article will cover everything you need to know about crypto burning, including its advantages, disadvantages, and the reasons behind it.
Dive in.
Key Takeaways
- Crypto Burning or “Token burning” is a method that involves removing tokens or coins permanently from circulation. The process is carried out by sending them to an address that is not recoverable thereby reducing its supply.
- The coins are sent to a "Burn address” which cannot be accessed by anybody.
- Burning of coin is used to control the price of the coin as its value increases due to the limited amount of coins available.
- Proof- of-Burn is used to ensure Transparency and prevent cyber-attacks.
What is Crypto Burning?
The goal of cryptocurrency burning is basically to take tokens out of circulation forever. The process is carried out by sending them to an unrecoverable address thereby reducing its supply.
In simple terms, it is like dumping the excess crypto in a black hole where it will be forgotten forever. This action can either benefit the cryptocurrency or backfire, depending on developer and user sentiments. Also, the rate of supply and demand should be taken into consideration.
For example, In May, a total of 3 billion USD tokens was burned twice, consecutively by Tether using an account called "Tether Treasury". The burn was used to boost the stablecoin after the negative influence on Tether reduced it to $0.95.
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This case study shows how burning controls the coin supply and its value subsequently.
How It Works
Although this process works for the project developers, knowing how it works for a crypto trader is important. To participate in the burning process, you'll need to initiate it by calling the "burn function." Afterward, you'll specify the amount of coins you want to burn.
Once you have done that, the token’s smart contract verifies that you, the holder, have enough tokens in your wallet. The system then checks whether the specified number of tokens is available. If the tokens are insufficient or invalid (e.g., 0, -2, -0.5), the request is deemed invalid, and the burn function is canceled.
If you have enough tokens and the number you requested to be burned is available, the function starts. When the function finishes, the number that you input is removed from your wallet and sent to a “burn address” or “eater address.” This address is special because it has no private key associated with it, which means no one can access the coins once it has been sent there.
Once this happens the specified amount of coins that you put in cannot be recovered again, it is gone forever.
For example you want to burn some amount of ETH, all you would have to do is to send the amount of ETH that you want burnt to the Ethereum burn address Which is
Ethereum burn address: 0x0000000000000000000000000000000000000000 and your ETH is gone for good.
Why the Waste?
There are several reasons why a cryptocurrency might choose to burn coins and those reasons directly impact the market. Some of those reasons include:
Increased Value:
This is a major reason for burning coins. As we previously stated, the main aim is to control the amount of coins available in the market ensuring that there is no excesses because it increases the value of the coin.
Control Inflation:
The way traditional money can lose value through inflation — the same thing can happen with cryptocurrency. By reducing the supply, inflation can be reduced thus maintaining the value of the token.
Improved Token Economics:
Some tokens are designed to fit into some economic roles with certain goals in mind.
These goals can be achieved by burning coins.
For example, Stablecoins aim to offer a price that is the same as the U.S. dollar, therefore they have to burn excess coins to maintain that goal.
Rewarding Users:
Sometimes, burning cryptocurrencies is used as a reward system. For example, as a coin holder or community member, you might receive rewards that involve burning a part of a coin.
Spam Protection
Token burning can help protect blockchain networks from Distributed Denial-of-Service (DDoS) attacks. This is a result of cyber-criminals using bots to send a large number of requests to targets overloading their network. As a result of this, a system known as Proof-of-Burning is used to keep these types of attacks in check.
Types of Crypto burning
There are various types of token burning and they are chosen depending on the goals of the Blockchain network.
- Regular token burning
This is usually done to reduce the overall supply of tokens and increase the value of the coin. It involves regularly removing a certain number of tokens from circulation. Most times it is done at intervals, such as monthly or quarterly.
- Token burning as a reward
Here, Tokens are burned as a reward for certain actions or activities. For instance, when users complete a certain task the company may burn tokens as a reward for users.
- Token burning as a penalty
In this case, tokens are burned as a penalty for certain actions. For instance, if a user violates the terms of service the project may burn tokens as a penalty.
- Token burning to align interests
In this type, tokens are burned to align with the project's goals thereby boosting the interest of different stakeholders. For example, a company may burn tokens held by the project development team to align their interests with those of the token holders.
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Mechanisms for Crypto Burning
Coin burning can be done by two ways manual or automatic means:
Manual burning:
This is when a project team or designated authority burns coins at a specified interval or based on certain conditions. It relies on an intermediary though flexible, it raises questions about centralization and trust.
Automatic burning:
In this mechanism of burning, smart contracts are used to automatically start the process of burning coins based on predefined prompts, such as transaction volume or time intervals. It is usually seen as more transparent and reliable as it operates without human intermediaries.
Cases and Examples of Crypto Burning
Various Networks have adopted burning to achieve their goals and market dynamics.
For instance, coins like Binance Coin (BNB) and XRP (XRP) as part of their strategies to increase the value of the coins, the project which regularly burns based on the trading volume, gas fees, token price, and number of blocks produced.
Chiliz (CHZ), the token of the Socios platform, has recently implemented a token burn mechanism aimed at reducing inflation in both the short and long term.
Stablecoin providers like Circle (USDC) and Tether (USDT) have previously burned tokens to maintain accurate backing ratios while issuing and redeeming stablecoins. Similarly, tokens like Wrapped Ethereum (WETH) burn tokens to lock and redeem coins used on different blockchains.
In 2021, the Ethereum London Hard Fork upgrade (EIP-1559) introduced the burning of a portion of tokens used to pay transaction fees or Ethereum gas fees. Since the implementation of EIP-1559, over 4.3 million ETH tokens have been burned, with projections to burn over $10 billion worth of ETH to reduce the overall supply. However, this burn rate has been gradually slowing down after 1,000 days since the first burn.
Ethereum users had hoped for a method to counterbalance the influx of new tokens, which led to the rise of layer 2 networks and the recent Dencun upgrade. As a result, Ethereum users have burned over 4.3 million ETH, worth over $12.7 billion, simply by using the network.
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ETH Crypto Burning
The Ethereum platform requires a gas fee for transactions, paid in Ether, which is divided into two components: the base fee, charged by the network and burned, and the priority fee, paid to block builders as an incentive to speed up the transaction process.
When activity on the Ethereum network increases, the base fee is automatically raised by the blockchain. The standard for the average base fee should not fall below 23 gwei—a measurement for small amounts of Ether—to maintain deflationary pressure.
However, in the past 1,000 days, the average gas fee has risen to 41 gwei, which is expected to reduce Ethereum’s supply by 0.76%, though this outcome is uncertain.
On March 13, Ethereum upgraded to Dencun, introducing a new feature that cuts fees by 98% on Ethereum layer-2 networks and submits transactions to the main Ethereum network. Since the Dencun upgrade, Ethereum transaction fees have dropped from an average of 58 gwei on March 13 to 7 gwei on May 2, prompting more users to migrate from Ethereum to layer-2 networks.
More Ether was burned when Ethereum transitioned to a proof-of-stake consensus mechanism in September 2022, further reducing Ether emissions.
Impact of Crypto Burning on Other Meme Coins
Shiba Inu is the second-largest meme coin by market capitalization and has gained attention for its recent layer-2 scaling solution, Shibarium, which launched in August of the previous year. Shibarium aims to reduce transaction costs, improve transaction speed, and enhance scalability within the Shiba Inu ecosystem.
Daily transactions on the platform have surged to over 14,000, representing a 100% increase from the previous day. As of July 1, 2024, Shibarium's total transactions are approaching 420 million, with wallet addresses exceeding 1.8 million.
Advantages of Burning Crypto
Transparency:
Due to the fact that the record of the coin burn transaction is stored on the blockchain, traders can easily check the progress of the transactions. This transparency helps to develop a long-term bond among project developers and traders
Environmental Friendliness:
The energy consumed in the process of Crypto burning, especially the PoB system, is low compared to Proof-of-work (PoW). This gives Proof-of-Burn (PoB) an advantage in the increasing demand for environmentally sustainable projects.
Use of incentives:
Everybody likes to benefit from a program they are involved in. When token holders participate in coin burning, rewarding them can encourage more people to burn coins too. This also attracts more people to participate in the community's project.
Disadvantages of Crypto Burning
Irreversibility:
The idea of "Once lost can never be recovered" can be a huge loss and regret to traders if the price of the token that was burned rises.
Market Volatility:
It is common knowledge that the price of a token is affected by various factors causing the rapid fluctuation of the price. One of the factors that affects its price is the popularity of the coin, especially on social media.
The News of the burning of a token usually spreads and is celebrated by the crypto community. As a result of this, the Token becomes very popular thereby briefly increasing the price of the token.
Less Impact:
The impact of a burned token can only be felt if a huge amount is burnt. For a token that has up to 100 billion and above, burning as little as a few hundred does not affect its value.
Expert Opinion on Crypto Burning
Joël Pobeda, Co-founder of Ledger, believes that the purpose of crypto burning can vary. After 15 years in the retail and distribution business, he believes that the economic law of supply and demand applies to crypto too. Hence, crypto burning can help control inflation by reducing supply and increasing demand. Additionally, it can be used to reward long-term holders or demonstrate the project’s commitment to a deflationary monetary policy.
Brenton Thomas, another expert in market analysis says crypto burning is a transparent process every growing project carries out to maintain their price stability. Regular burn events are often publicized to ensure transparency and trust within the community. Interestingly, most of the time, the results have been positive, leading to scarcity and high value.
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Conclusion
Though this concept has its advantages and disadvantages, crypto burning is an important concept in the crypto space. The supply and control of the price of the token can be protected with the use of this technique.
By understanding crypto burning, you can make accurate decisions about investing in a particular token. It is thus important to do thorough research on the effect of burning on whatever project you want to take part in.
Whether you are a new or experienced crypto investor, knowledge can enhance your understanding. It'll broaden your scope on how cryptocurrencies operate and the factors influencing their value.
Frequently Asked Questions (FAQs)
Crypto is burned by sending the token to a special address known as a "Burn address". This address is not accessible by anybody therefore the coin is lost forever.
Yes, It is a well-known practice and is done to benefit the cryptocurrency world. However, the burning process must be transparent and legal.
The community and Project developers are the key individuals known for crypto-burning decisions
Some projects burn coins regularly while others might do it only when it is needed. It all depends on the cryptocurrency used.
