Burning cryptocurrencies is the deliberate destruction of a certain number of tokens in circulation. Such a mechanism for regulating emissions uses a lot of cryptocurrency projects, writes RBC Crypto.
Why and how do developers burn their coins, and what benefits do investors get?
Tokens can be destroyed for several reasons: for example, in order to increase the exchange rate of the cryptocurrency. Burning part of the coins makes each remaining token more in demand and its price increases.
Also, the withdrawal of cryptocurrencies from circulation is carried out to prevent inflation and depreciation of the asset. With unlimited issuance, the number of coins is constantly growing, and each individual token is gradually depreciating. Then the developers conduct a burning to avoid a drop in the cryptocurrency exchange rate. Thus, there is always about the same amount of cryptocurrency in circulation. The volume and frequency of this operation depend on the emission rate.
Some projects destroy coins after the ICO (initial distribution of tokens); if not, the entire volume of cryptocurrency was sold during the campaign. In this case, developers keep the price of coins already purchased by investors.
Transaction fees are usually sent to miners, but there are cryptocurrency projects in which these funds are destroyed. To do this, a transaction is carried out, the commission to which is set at the amount necessary for burning the amount. The sent tokens remain in the blockchain, and the extra funds are “eaten” by the system.
Sometimes developers initially put the Proof-of-Burn algorithm into the blockchain. When performing an operation, miners send part of the coins to a special address to which no one has access. The transaction is recorded in the blockchain, proving the destruction of coins.
Many projects use the method of burning through a wallet without private keys. The amount that needs to be destroyed is sent to it. There is no access to such a wallet, so any interaction with tokens at such an address is not available. Projects openly publish data on such wallets and incineration operations.
For some types of cryptocurrencies, special software has been developed that allows you to burn previously created coins. This is one of the easiest ways to destroy tokens: the user only needs to enter the amount necessary for burning into the program, and the process will be started automatically.
During the hard fork, changes are made to the blockchain, in which the old network version ceases to function and support tokens. The new version of the blockchain is launched with the amount of cryptocurrency that was decided to remain in circulation.
In August 2022, the Ethereum ecosystem updated London and changed the structure of commissions: the payment for transit in the block (for gas) was partially sent to the network for burning, partly to miners as a reward. To date, the largest “burners” of Ethereum are the Opensea NFT marketplace and the Uniswap crypto platform. The rate of destruction of tokens is about 900 thousand. ETH per year.
In 2017, before the start of the ICO, the Binance exchange issued 20 million BNB and announced plans for quarterly burning of tokens until half of the coins are destroyed. From the end of 2021, the number of tokens burned is calculated automatically and depends on the number of transactions on the exchange.
Binance also destroys part of the BNB Chain gas fee in real-time. The exchange practices burning by transferring money to an address that is not available for use.
The project developers use the same method of destroying tokens. The total number of burned TRX tokens is approaching 8 billion. The native token of the platform is destroyed not only to control the price of the coin but also by the algorithm that provides a decentralized USDD stablecoin.
The mechanism of burning tokens was incorporated into the cryptocurrency algorithm initially. With each transaction, 0.00001 XRP is destroyed. The project concept assumes a certain number of coins, which should not increase, which, according to the developers, will avoid inflation. At the same time, this algorithm reduces the number of spam transactions.
To attract the attention of investors, coin burning is actively practiced by many different cryptocurrency projects: Shiba Inu, Stellar, BabyDoge, Elastos, Optimism, Fidelium, and others.
Destroying coins, developers redeem them for their own money or somehow sacrifice part of their income. However, while still remaining holders of this cryptocurrency, they are betting that the asset will grow in value in the future. In many cases, burning is carried out for more successful development of the crypto project and to attract more users.
The withdrawal of tokens can be compared to the repurchase of shares in the traditional market. Companies buy back their securities to reduce their market numbers and strengthen quotations. Thus, the positions of shareholders and the company are strengthened.
At the same time, burning coins can strengthen the reputation of a crypto project. The destruction of tokens left unsold after the initial placement increases the level of trust in developers and contributes to the consolidation of coins on the crypto market.
Investors also benefit when the project burns unsold tokens after the ICO. Therefore, initial asset placements, after which the burning of the remaining tokens is announced, are more popular. The use of this tool indicates that developers believe in their project and that, in the long term, the exchange rate will rise.
However, burning coins does not guarantee an increase or stabilization of the value of assets: if the project is not in demand, reducing the number of coins will not affect the token rate in any way. Also, the impact of the general market situation should not be excluded. During periods of increased uncertainty, the destruction of cryptocurrencies may not have the desired effect.