Token Burn
TokenA cryptocurrency token is a digital asset that is created and managed on a blockchain network. Tokens are usually created using existing blockchain platforms, such... More Burning, in the context of cryptocurrencies, refers to the process of permanently removing tokens from circulation, thereby reducing the total supply of that particular token. This process is achieved by sending a certain number of tokens to a public addressString of text that designates the location of a particular wallet on the blockchain. Often a hashed version of a public key. More, known as a “burn address,” from which they can never be spent because the private keys of this address are unobtainable. The burn address is typically generated randomly and is not associated with any particular user in the network.
Token burning is a common practice in the cryptocurrencyCryptocurrency is a digital or virtual currency that uses cryptography for security and operates independently of a central bank. Cryptocurrencies use decentralized technology called blockchain... More world and is used for various purposes. One of the primary reasons for token burning is to control the number of tokens in circulation and thereby maintain or increase the value of the remaining tokens. This is based on the economic principle of supply and demand: when the supply of a token decreases while demand remains the same or increases, the price of the token tends to rise.
For example, Binance, one of the world’s largest cryptocurrency exchanges, regularly burns its native Binance CoinA cryptocurrency coin is a digital form of currency that uses encryption techniques to regulate the generation of units and verify the transfer of funds.... More (BNB) as part of its commitment to decrease the total supply from the initial 200 million to 100 million BNB. This is done to increase the value of the remaining BNB tokens and reward holders with a potentially higher price.
Another reason for token burning is to pay for transaction fees within a blockchainThe blockchain is a digital ledger that records transactions in a secure and decentralized manner. Think of it like a shared spreadsheet that is constantly... More network. In the EthereumEthereum is a type of cryptocurrency that is similar to Bitcoin, but with some important differences. One of the key differences is that Ethereum is... More network, for instance, a portion of the gasGas is a unit used on the Ethereum blockchain to measure the computational effort required to execute transactions and smart contracts. It's the fee paid... More fee (the cost of performing operations like transactions and smart contractSmart contracts are self-executing computer programs that automatically enforce the terms of a contract when certain conditions are met. They are typically used in decentralized... More interactions) is “burned” or removed from circulation.
Token burning can also be used as a mechanism for proof-of-burn consensus algorithms, where miners must show proof that they have burned some coins—i.e., sent them to a verifiably unspendable address—to create a new blockA block is a collection of transactions that have been verified and added to the blockchain. Each block typically contains a cryptographic hash of the... More. This is seen as an alternative to proof-of-work and proof-of-stake consensus mechanisms.
It’s important to note that token burning does not guarantee a rise in the price of a token. The effect of token burning on the token’s price depends on various factors, including the overall demand for the token and market conditions.
References:
- “Initial coin offerings and the value of crypto tokens.” Momtaz, Paul P. The Journal of Finance 75.3 (2020): 1343-1385. Link
- “Non-fungible tokens (NFTs)An NFT, or non-fungible token, is a type of cryptocurrency token that represents a unique digital asset, such as artwork, music, or collectibles. Unlike fungible... More: Overview, valuation, and the size of the market.” Dowling, Michael. Finance Research Letters (2021): 102140. Link
- “Understanding Token Burning in Cryptocurrency: A Comprehensive Guide” HaasOnline. Link