What is the point of burning tokens? =

With many cryptocurrencies, the number of circulating tokens increases over time . Consider, for example, Bitcoin (BTC), where the last cryptocurrency is expected to enter circulation in 2140. Other projects are busy reducing the number of circulating tokens. They do this by means of a token burn.

Token burns take place on the blockchain and cause tokens to go out of circulation. Any blockchain could perform such a token burn, driven by the developers of a project or the community/DAO behind it.

Burning tokens can be for various reasons and useful. Still, at first glance, it might sound crazy for projects to burn their own tokens. So let’s take a look at why a token burn is so important and useful .

View quickly

 

  • View quickly
  • What is a token burn?
  • How does a token burn work?
    • Burn your own tokens
  • Find destroyed tokens in the tokenomics
  • Why should you burn tokens?
    • Increase the value
    • Proof of Burn (PoB)
    • Keep mining balance equal
  • Token burns in practice
    • Binance Coin (BNB)
    • Ethereum (ETH)
    • Slimcoin (SLM)
  • Benefits of a token burn
    • Disadvantages of a token burn
  • Conclusion

What is a token burn?

In a token burn, tokens are taken out of circulation . Every cryptocurrency has a certain number of cryptocurrencies in circulation, part of the tokenomics. Increasing the number of circulating tokens is quite easy, because new tokens can be created for this. However, taking tokens out of circulation is a lot more difficult. It’s not a matter of adjusting a number. No, for that they have to burn the tokens.

A token burn occurs by sending the tokens to a non-existent or wrong address . This is an address that belongs to no one. Therefore, no one can get to the tokens associated with this address. This ensures that the tokens that are burned can never come into circulation again.

Of course, that does not mean that the number of circulating tokens cannot grow after a token burn. The developers or the community can easily create new tokens for this.

The video below explains what a token burn is and how it works technically.

 

How does a token burn work?

We will go into more detail about why people would burn tokens, but first take a look at how this phenomenon works. In a token burn, tokens are destroyed by sending them to an incorrect or non-existent wallet address.

Every cryptocurrency is linked to a wallet address . This can be a wallet address of a user, but also an address of (for example) a smart contract. In a large database, each token is linked to a wallet address. When the wallet address wants access to its tokens, the computers in the blockchain can immediately see which tokens are linked to the wallet address.

With a token burn, the tokens are linked to a wallet address that is incorrect or does not exist. Since no one can own this wallet address, no one can ever access the tokens associated with this address . It is therefore impossible that someone later receives a wallet address that is the same as the address to which destroyed tokens are linked.

This also means that the tokens do not actually ‘disappear’. They still exist, more can never be sent again .

Burn your own tokens

You can also easily burn tokens yourself by sending them to a non-existent address . Do not try this, because it is impossible to get the tokens back. After all, the blockchain has no customer service that can help you with this. That is why it is also important to always check the wallet address carefully when sending tokens to other users.

Find destroyed tokens in the tokenomics

You can find the burned tokens in the tokenomics of a cryptocurrency. There is always a maximum stock, total stock and circulating stock. You will understand how to find the burned tokens when we look at the difference between these terms.

  • Maximum stock is the maximum number of tokens that will be created. For Bitcoin, the maximum supply is set at 21 million BTC, and this number will NEVER be increased.
  • Total supply is the maximum supply minus the number of tokens burned. These tokens will no longer be released, and are therefore not considered part of the circulating supply.
  • Circulating supply is the number of tokens that are currently tradable. This number can always increase as the project may release new tokens in the future.

Why should you burn tokens?

Burning tokens may sound strange: why would you do that? Yet there are several reasons why a token burn can be effective and can help a project further . In fact, many projects wouldn’t do well if they hadn’t destroyed tokens. Let’s take a look at the top reasons for token burning.

 

Increase the value

We probably don’t need to tell you that a product becomes more valuable when supply drops relative to demand. This determines the value of cryptocurrencies. When demand rises and supply falls or stays the same, the price is likely to increase. This is also the case when the fall in supply is greater than the fall in demand.

Removing tokens from circulation reduces the supply. This can cause the price of the token to rise, although this is of course never a guarantee. There are also known cases of cryptocurrencies dropping in value after the team decided to burn a large portion of the tokens.

A development team must have a good reason for a token burn, otherwise this can cause people to lose confidence in the project.

Proof of Burn (PoB)

Proof-of-Burn is a consensus mechanism, just like Proof-of-Work and Proof-of-Stake. This mechanism is used to reach agreement within the network so that nodes can process transactions and create blocks. The difference, however, is that these nodes do this by burning tokens, using the token burn principle.

In Proof-of-Work, a node has to provide computing power to process transactions, while in Proof-of-Stake, a node has to store tokens. With Proof-of-Burn, a node has to send tokens to a non-existent wallet address in order to show its commitment to the network. The node is then allowed to validate transactions in order to earn money within the blockchain network.

Keep mining balance equal

When a new cryptocurrency is released from mining, the mining speed is reduced . The miners who have been active for a longer time can take an unfair advantage of this compared to new miners. In that case, new miners hardly get a chance. Therefore, developers can choose to burn tokens so that the number of circulating tokens decreases or remains the same. This gives new miners a chance to earn money within the network.

This also contributes to the decentralization of the network . When it is attractive for new miners to set up a node, they will continue to do so. Otherwise, the network will continue to consist of the same nodes and all blocks will be created by these same nodes.

Token burns in practice

Enough reasons to burn tokens! Yet you don’t hear about it very often in practice. However, there are several projects that deal with burning tokens. Below you can see a number of examples of token burns in practice.

Binance Coin (BNB)

The most famous example is probably the Binance Coin, which runs on the Binance Smart Chain (BSC). An auto-burn is programmed within the protocol . With this, crypto exchange Binance, the maker of the blockchain and cryptocurrency, wants to reduce the number of circulating tokens. This should benefit the price. Why is Binance doing this? Because they want to reward their community for using and holding Binance Coin.

Binance buys BNB tokens every quarter with part of the profit made. Then these tokens are automatically burned by sending them to non-existent addresses.

Ethereum (ETH)

During the upgrade to Ethereum 2.0, a token burn took place within the Ethereum blockchain. To be precise, that happened in 2021 during the introduction of the EIP-1559 upgrade. This upgrade was also intended to reduce transaction costs.

At least 2 million ETH tokens were lost during this token burn . After this, more tokens were burned. This shows that a token burn can also be essential to optimize the functioning of a blockchain. If Ethereum did not perform this token burn, there was a chance that transaction costs would remain high. This does not benefit the Ethereum network, because many end users were not satisfied with the high transaction costs that the network charged.

 

Slimcoin (SLM)

Slimcoin is a cryptocurrency that uses Proof-of-Burn as a consensus mechanism. Miners can burn tokens within the Slimcoin network to create blocks. By burning tokens, miners also have a chance to receive blocks for validation for at least a year. They can then earn money with this.

By the way, it is not necessary to burn SLM tokens, because the network also allows the burning of BTC. Yet for many miners this is not worth it because BTC is seen as an important investment asset.

Benefits of a token burn

Enough talk about why a token burn is so useful and which projects use this technique in practice. To summarize everything again, we will look at the main benefits of a token burn.

  • Keep value the same or increase – A project wants as many people as possible to buy and keep their token, but for that to happen the value will have to stay the same and better yet, increase.
  • Building a community – A project can build a community by performing a token burn. This gives the community the feeling that the developers have the best interests of the token holders in mind.
  • Improved operation – By burning tokens, a development team can effectively ensure that the network and blockchain work better, without immediately having to make major changes to the code of the blockchain.

Disadvantages of a token burn

There are of course also disadvantages of token burns . The main disadvantage is that assets are lost, and many people think that is a shame. Tokens can be worth a lot of money, which makes a token burn an expensive operation. Just think of the token burn of 2 million ETH. Assuming ETH had an average value of $1,500 at the time, $3 billion was lost during that upgrade.

Conclusion

So a token burn can be extremely useful . Sending tokens to a non-existent address will destroy them forever. No one can ever get to the burnt tokens again.

Such a token burn occurs when a project wants to increase the value of its cryptocurrency. A decrease in supply usually leads to an increase in price. Another reason for the token burn can be the functioning of the blockchain, in the case of Proof-of-Burn for example. This consensus mechanism allows miners to burn tokens after which they can create blocks. Token burns also take place for network optimization, such as restoring the mining balance or lowering transaction costs.

Well-known projects that have applied a token burn are Slimcoin, Ethereum and Binance Coin . In the case of these projects, burning tokens has paid off.

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