Topics Crypto
Bybit Learn
Bybit Learn
Beginner
Jul 21, 2022

Token Burning: What Does Burning Crypto Mean?

Maintaining the value of an asset can be a difficult obstacle to overcome. When it comes to cryptocurrency, many people worry about the high number of coins in circulation and the ability to produce coins at a fast rate. This has led several cryptocurrencies to find innovative ways to incentivize investors and help maintain the value of their coins.

Burning cryptocurrency is a popular method of boosting the value of a coin or token. Token burning removes coins from circulation, permanently decreasing the overall supply of the cryptocurrency. This helps to increase scarcity and raise the value of each remaining coin, which is crucial for coins that can be mined quickly.

What Is Token Burning?

Token burning means removing coins from the overall supply of a cryptocurrency. This typically involves sending the coins or tokens to a wallet with no known private keys. This wallet can only receive assets, thus effectively making them inaccessible.

While burning a small portion of coins can help maintain the value of a cryptocurrency, the token burning process is often a community effort. Occasionally, substantial cryptocurrency holders or people with a large social media following will encourage a community burn. When everyone burns a small number of their holdings at the same time, it can make a notable difference in the overall number of coins in circulation — and, therefore, in the coin’s value.

In other cases, token burning happens steadily over time.  Many users don’t even notice it. For example, Ethereum burns a small percentage of Ether during each transaction. This adds up over time, which can cause the coin to steadily increase in value as supply decreases.

How Does Token Burning Work?

There are a few different ways to burn tokens, the most common being sending the tokens to a wallet to be destroyed. Technically, all a user needs to do to burn coins is to send them to a wallet with an invalid address. However, most cryptocurrencies have specific instructions and processes in place for burning tokens.

Some cryptocurrency projects establish their own burn systems. For example, in April 2022, Shiba Inu released an easy-to-use burn portal. By working with Ryoshis Vision developers, Shiba Inu is able to offer rewards to anyone who uses the burn portal to destroy SHIB tokens.

Other cryptocurrencies use a burn function to destroy assets. Binance Coin has a burn function which any cryptocurrency holder can execute, simply by stating how many coins in their wallet they’d like to destroy. Smart contracts first check to see if the holder has the coins available in their wallet, and then subtract them. Binance Coin then automatically updates the total number of coins in circulation.

Keep in mind that any coins burned will be permanently removed from your account, and there’s no way to return them. Before you execute a burn function or send tokens to a null address, double-check to make sure that all of the amounts and information you’ve specified is correct.

In other cases, the token burning process is automatic. For example, some networks burn a small portion of cryptocurrency during mining, or as a transaction fee.

The Applications of Token Burning

There are several reasons why cryptocurrency holders burn coins and tokens. As technology continues to expand, people are finding more innovative ways to utilize burning. Here are a few examples of how token burning can be used.

Proof of Burn

Proof of burn (PoB) is a consensus mechanism that verifies and validates a transaction. This algorithm enables miners to effectively burn coins with no energy waste. PoB can be verified using a blockchain explorer if needed.

PoB has several practical uses. It’s primarily used to prevent fraud by automatically verifying each transaction. It also maintains miners’ ability to mine new coins, as several cryptocurrencies require miners to burn coins first in order to mine new blocks.

Increase Value

One of the major benefits of token burning is the effect it can have on the cryptocurrency’s value. For multiple reasons, the average price per coin can increase after a large burn. The goal of token burning is to reduce the overall supply of a cryptocurrency, thus raising demand. In theory, if the demand is high and the token supply is low, the price will rise.

Another potential reason coin prices can increase after a burn is publicity. Many large token burns are community-driven. In some cases, these token burns are coordinated through social media. At other times, an investor will intentionally burn a large portion of the tokens in circulation and post about it on social media. This can help raise awareness for the cryptocurrency, further increasing demand and raising the price per token.

How long and how much the price per token will increase with each burn is a matter for debate.

Promote Mining Balance

Keeping a network efficient can be difficult. Every time a new token is created, mining speed is reduced. This gives many early miners an unfair advantage over new users. Token burning grants miners the right to mine new tokens. Rather than burning one token when mining first begins, the process is spread out and, consequently, more proportionate.

In some cases, miners don’t need to burn the same token they’re mining. Because proof of burn is customizable, networks can offer a variety of rewards to miners. This encourages healthy network activity.

Pros of Token Burning

People never want to destroy assets without a purpose. While destroying coins and tokens may seem counterproductive, there are several reasons why users burn their crypto. Aside from gaining mining rights to mine new blocks, token burning can (as mentioned) help maintain the value of an asset.

Maintaining the Value of Coins for Investors

The goal of token burning is to stabilize prices and boost confidence among investors. When demand remains at a steady level, decreasing the overall available supply of a coin can lead to higher prices. By burning cryptocurrency on a regular basis, or with each transaction, many altcoins are able to steadily increase demand over time.

Strengthening Cryptocurrency Communities

Behind some of the most popular altcoins are great communities. Successful blockchain projects tend to have several people advancing them, and numerous investors actively using them. Large community-driven token-burning initiatives can inspire others to invest or become involved with a project.

Cons of Token Burning

Before you start burning your tokens, there are several things to consider. If you aren’t burning coins to gain mining rights, you need to think about how token burning will affect your portfolio. If the token burning is automatic, consider how often you’ll make transactions using the cryptocurrency. How a cryptocurrency handles token burning can also influence which coins you choose to invest in.

Permanent Loss of Assets

In order to burn tokens, you first need to own tokens. Once the token burn is completed, the tokens are permanently removed from your wallet. That means you no longer own those assets, even if the price per token skyrockets afterward. With some coins valued at well under a penny, this could lead to regret later, especially if you’re burning thousands at a time.

Before you burn tokens, consider both the current and expected value of the cryptocurrency. Identify all the factors that have an impact on the price of the coin. Then, carefully think about how much you want to burn. Remember: You can’t undo the transaction once it’s completed.

Large Amounts are Needed to Make an Impact

One of the biggest cons of token burning is that small amounts won’t have a big impact on price. For example, there are 487 trillion Shiba Inu (SHIB) coins currently in circulation. Burning a few thousand SHIB wouldn’t make a difference in the overall supply. However, more than 263 billion SHIB have been burned by the community since October 2021, roughly 0.05% of the total circulating supply.

Examples of Token Burning

Any cryptocurrency can be burned. For example, an estimated 4 million bitcoins have been burned or lost over the years. Other cryptocurrencies have adapted regular token burning into their strategies. Some major examples include Ethereum, Shiba Inu and Binance Coin.

Ethereum

In 2021, Ethereum (ETH) introduced the EIP-1159 upgrade, which restructured the fee model and began burning Ether with each transaction. The amount of Ether burned fluctuates based on the demand for block space. Over 2 million Ether have been burned using this controlled, steady method, and that number continues to grow every day. While Ethereum 2.0 is still in development, the upgrade is expected to increase the number of coins burned per transaction.

Shiba Inu

Shiba Inu (SHIB) is often in the headlines for initiating large token burns. One way in which investors are encouraged to burn coins is via the burn portal, which was introduced in April 2022. However, Shiba Inu began making headlines for token burning long before that. About one year after the coin was launched, the coin’s creators sent Ethereum cofounder Vitalik Buterin 50% of the total SHIB supply. In response, Buterin burned over 400 trillion SHIB and made a sizable donation to charity.

Binance Coin

Binance Coin (BNB) is known for its auto-burn. This strategy automatically reduces the number of total coins in circulation each quarter. The first BNB auto-burn was in October 2017, when 0.49% of the total supply was destroyed. Because the coin-burning event is automatic, and is based on price and the number of new blocks created on the Binance Smart Chain (BSC), investors don’t need to worry about too large a portion of the supply being burned at once.

In addition to the auto-burn, Binance Coin burns a portion of the gas fees associated with each transaction on the Binance Smart Chain.

Is Token Burning Essential?

Token burning isn’t essential for a cryptocurrency to function. However, as discussed above, regularly burning tokens is healthful for a network. Investors may focus on the impact coin burning can have on the value of a token, and miners may find coin burning necessary in order to effectively mine new tokens on a network.

Closing Thoughts

While there’s no guarantee that coin burning will increase a cryptocurrency’s prices, it can be a useful tool to help maintain value and incentivize investors. If you choose to invest in a cryptocurrency, examine its burn strategy to see if it aligns with your goals. Whether you plan on manually burning coins or using a coin that automatically burns portions of its supply, make sure to always have a clear idea of what you’re investing in.