Coin burning gained unexpected popularity after 2017 and developers were noticed burning millions of coins. Binance Coin (BNB), Bitcoin Cash (BCH), and Stellar (XLM) burned their native tokens in 2017-18 to narrow down the supply and expand prices.
WHAT IS CRYPTO BURNING?
Burning Cryptocurrency can be treated as an equivalent to destroying of cryptocurrency. In a crypto burn, some coins or tokens are permanently removed from the circulation and are sent to a dead wallet from where they can never be recovered for further use. Generally, the wallets used for the purpose are the ones which do not have the private keys.
Therefore, burning does not mean to burn in literal sense by putting the coins in fire, rather it means that the tokens are sent to such a wallet address from where they can never be retrieved and hence spent in future. These address are referred to as ‘burn address or eater address’ in the crypto community.
Stablecoins also maintain their value against the pegged currency by burning excessive tokens.
Why burn crypto?
The tokens are generally burnt to preserve or enhance their value. Some blockchains also use smart contracts to achieve periodic burning of some tokens. These smart contracts pull a certain number of coins in circulation and send them to a burn wallet.
Both Binance Smart Coin (BNB) and Ethereum (ETH) regularly burn coins to sustain their value in long term.
1. To control Deflation
This act of burning crypto tokens is based on the economics of demand and supply. Burning helps in reducing the supply of tokens in the market and therefore acts as a deflationary tool. When the supply of a particular token is shrunk in size, its demand in the market increases and consequently this scarcity leads to appreciation in the market price of the remaining tokens.
If the supply is not controlled, the supply exceeds the demand and the price of that particular token remains low.
2. To Become validators or Miners
Some of the coins also allow the users to become validators by burning their own cryptocoins. For this, they have to establish Proof of Burn.
Proof of burn is an algorithmic mechanism in which users burn their own tokens that they have staked to become network validators or miners. The chances of becoming a validator is directly proportional to the quantum of coins burnt by a person. This loss taken during burning by the user is compensated in the long run by wealth gains when these validators or miners receive newly minted coins for each transaction that they verify and add to the blockchain. Generally, the miners burn their native currency but in some cases they also have an option to burn alternative cryptocurrency like Bitcoin.
Thus, burning coins depicts a user’s commitment over a long period of time in exchange for their short-term loss.
3. To take care of unsold tokens at ICO
When new tokens are launched at an Initial Coin Offering (ICO) in the market, some of them remain unsold and developers burn these tokens to power up the coins gone in circulation. This not only leads to a price jump in the value of coin for everyone but also reflects the developer’s good and sustainable intentions for the future.
4. To give dividends
Dividend Burns is a procedure in which the developers buy back some tokens from the open market and burn them. This burning results in appreciation in the monetary value of that particular token which acts as dividend reward for all the existing token holders.
It is a concept similar to buyback of shares by the parent company. The company buys back shares at the market price and reabsorbs them, reducing the number of total shares in the market and thus leading to increase in the market value of the rest of the stocks.
Famous Cryptocurrency Burns
- Shiba Inu Coin (SHIB) has been in limelight for its token burning, as community efforts to burn SHIB are the most visible and powerful. Till now more than 410.32 trillion SHIB have been burned which is almost 41% of the total circulation. The credit for maximum burn of Shib goes to Vitalik Buterin who destroyed 90% of his tokens in 2021, amounting to $6 billion then and trillion of dollars now. Vitalik Buterin is the founder of Ethereum blockchain, and was given 50% of SHIB on its launch by Ryoshi, the creator of SHIB. After burning 90% of this, Vitalik donated his rest of the treasure to a charity fund.
- In another historical instance, The stable coin, Terra destroyed 88.7 million LUNA tokens worth $4.5 billion in 2021and 29 million LUNA tokens worth $2.57 billion in February 2022. The month of May, 2022 saw an excessive selling in the crypto market. Luna lost 99.9% of its value in just few days and was depegged from dollar despite of all the efforts by Do Kwon, CEO of Luna. Now burning of a huge amount of the token is proposed as a rescue plan for the token.
- The largest Cryptocurrency exchange Binance started burning its native token BNB in 2017 and has been doing so since then on quarterly basis. Binance plans to continue coin burn unless 50% of the total supply is cut off from the circulation.
- Similarly, The Stellar Development Foundation burned more than half of the Stellar native tokens (55 billion XLM tokens) in 2019. The market price of the burned token was $4.7 billions at that time.
Although burning of crypto tokens has only one motive, to increase the value of the remaining tokens in the market, But sometimes it is seen that during some malicious activities crypto tokens are sent to some controlled address inspite of a dead address. Therefore, the field becomes all the more vulnerable to the activities of the dark web and utmost care is required while dealing in them.
Though the market price of the token increases when the burn takes place but it is dependent on other market forces as well. Even then, burning of crypto tokens is regarded as a positive sign as it intends to promote and incentivize long-term holding among investors.
