The first time I heard that crypto currency would be burnt, I literally thought servers/computers that mine the coins would be heated to a certain degree and the coins would be vaporized…forgive me , as a newbie then, it was a really cool thought to have.
But that isn’t exactly what happens when Crypto tokens or coins are burnt, so what exactly happens when crypto token /coin is burnt and how does it affect the coin in question.
What is a Coin Burn
A coin burn is a strategy used by crypto projects to reduce the total coin in circulation, it is mostly done to reduce the availability of a coin/token and make it more scarce. Burning coins may influence the price or value of the coin. Popular coins such as Bitcoin and Ethereum haven’t had any burn yet, and a crypto coin burn is mostly carried out by alt-coin projects due to their large supply when the projects were created.
Coins are primarily burnt for the following reasons;
- To create a scarcity of coins and increase their value
- To destroy unsold tokens or coins after an ICO or token sale has ended.
- To create new coins and as an incentive to miners(proof of burn)
So now that we know that servers are not actually vaporizing the coins…
How Exactly is a Crypto Coin Burn Carried Out?
There are several ways of burning crypto coins that has been employed by crypto currency companies in recent year with some ways specific, while some are particular to a project
One of the most popular ways to carry out a token burn is to buy back or remove an amount of the coin in circulation, and send it to a private address mostly referred to as a burn or eater address. The burn address acts as a frozen address or a one way address that only accepts the coin or token transferred. Since it is a one way address, the coins that are transferred in can not be withdrawn, so they are “lost forever”, practically burned.
Alternatively, another way to burn a coin is to accept the coin itself as a gas fee for every translation done on the network, this reduces the supply of the coin with every transaction. This particular method has been used by Ripple for its XRP token.
Advantages of a Crypto Coin Burn
- To help the coin increase in value; Coin burns reduce the quantity of coin in supply, if after a burn the demand for the coin increases, the coin may increase in value.
- Coin burns can be used as a deflationary method. If a crypto currency has a high inflation rate, a burn can also be used to curb it.
- A coin burn can also be used as to incentivise holders of the coin
Disadvantages of a Crypto Coin Burn
- A cryptocurrency coin burn can be used to deceive investors. Developers can claim to burn tokens when they’re actually sending those tokens to a wallet they control
- Coin burns can also be used a way to hide whales who hold a large proportion of the coin
Since the inception of Crypto coin burning there have been several notable coins burnt.
Notable Crypto Coin Burns
Since the inception of the coin burn strategy, there have been several notable coins burnt.
Since 2017, Binance has been burning a percentage of it’s BNB supply quarterly and has committed to doing so until 50% of the total supply which is approximately 100,000,000 coins will be removed from supply.
Stellar, a crypto company as well burned 55 Billion of their XLM Coin in a bid to increase the coin’s value. The burn reduced XLM supply by over 50% leading to a noticeable increase in its price.
WakandaInu, a popular african meme token burnt 75% of its token in November 2021 also in a bid to increase the token’s value.
While burning a cryptocurrency coin doesn’t guarantee that the price of a coin will go up, it can serve to increase trust in a project or coin.
Now that you know how crypto coin burning works, what other topics would you like to know. feel free to drop your questions in the comment section
