What does this process imply? Everything you need to know about a mechanism that limits the circulation of digital assets to balance accounts.
Index
What is burning a token?
Burning a token involves taking a certain amount of digital assets out of circulation, sending them to inaccessible wallets which in jargon are known as “burning addresses” or “burn addresses”.
These digital wallets do not have an attached private key and so it is impossible to access them. By being introduced into a safe that has a “lock without a key”, the token is eliminated and cannot be traded.
The token burning process is similar to breaking a bill, which stops circulating in the market.
What are tokens burned for? The most frequent goal is to control the inflation of prices of a digital currency.
Through this process, which is carried out on a periodic basis, greater control is achieved in the price of circulating cryptocurrencies.
By burning, the demand for the asset is maintained and its value increases over time.
There are other reasons for burning a token, for example, within the framework of updates, it allows excesses to be shed.
How does token burning work?
To understand how token burning works, you should take into account the following aspects:
- This process is part of the nature of the blockchain.
- The goal is to take a certain amount of digital coins out of circulation.
- It involves sending them to a wallet that cannot be accessed.
- Usually, wallets called “black hole” are used, which in Spanish means “black hole”.
In particular, it is a common practice in some cryptocurrencies and utility tokens where a certain amount of tokens are destroyed, thus reducing its total supply. This is done to increase the value of the remaining tokens and can have a positive impact on the token’s price in the market.
The most renowned token burns
An example of token burning is the one periodically carried out by the cryptocurrency exchange Binance, which has committed to burning 20% of its quarterly earnings in BNB.
Other famous token burns, collected by the Decrypt site, are those carried out by the Otherside Metaverse project from Yuga Labs (creators of the Bored Ape Yatch Club NFT collection); and the one executed by the meme-coin Shiba Inu (SHIB) when in April 2022 it launched a platform for users to burn tokens and receive new ones in exchange, with rewards.
Is token burning good or bad?
Token burning has advantages and disadvantages. Among the latter, the inevitable loss of assets stands out.
What are the benefits of burning tokens? Let’s look at the most relevant ones.
- It is a mechanism to control the price of a crypto asset and ensure its stability.
- It is a way to curb the inflation of the price of a digital currency.
- In this sense, it allows improvements to be made to cryptocurrency networks.
- Some miners burn tokens to operate with a cheaper process, which consumes less energy in relation to classic mining.
- In general terms, burning tokens is favorable for investors because it is likely that the value of cryptocurrencies will increase over time.
In summary, in the right hands this process offers appreciable benefits despite the confusion it generates initially among those who wonder why someone would want to eliminate an asset with value.
Do token burns increase their value?
The process known as token burn can be described as an optimization, as it can cause an increase in the price of the assets remaining in circulation.
Why does this happen? Look.
- The price of an asset (also digital) is determined according to supply and demand.
- When there is more demand than available assets, they will have a higher price in negotiations.
- On the other hand, when an asset abounds that does not meet the demand, it is usual for the price to fall.
Besides the big differences between traditional and decentralized markets, the logic of supply and demand also applies in the latter.
That’s why token burn is important for value increase. It’s a process that helps balance the volume of available assets based on market movements.
In other words, by making the asset more scarce, its price usually goes up.
We say “usually” because that depends on many factors, including the amount of coins involved in the burn. Additionally, it’s important to know that often the effects go unnoticed for a good portion of users.