Demystifying Token Burns: What They Are and How They Work
Token burns are an increasingly popular topic of discussion among experienced cryptocurrency investors and traders. But nonetheless, few people are aware of the purpose of the practice of permanently destroying otherwise valuable coins and chips for the sake of the network.
Here, we demystify one of the basic building blocks of controlled care, helping to understand its role in the usefulness, value, and desirability of cryptocurrency.
What are Token Burns?
In short, token burns are essentially a reduction in the total supply of a cryptocurrency device by temporarily or permanently removing coins or tokens from circulation. The process is usually used by smaller or less established cryptocurrencies to encourage asset owners and increase value.
This mechanism is unique to cryptocurrencies in that only distributed ledgers provide the technology needed to permanently remove units of value from existence without any doubt. This can often be achieved by calling a combustion function encoded in the underlying protocol or blockchain involved in the issuance of cryptocurrency.
Once certain conditions are met, a fixed number of tokens can be burned with the burn function. The code that performs the combustion function then updates the entire set of the device, ensuring that the combustion is on the public record.
For block chains that do not have a burn function, the circulating supply can be reduced by sending tokens or coins to a “burn address” that is essentially an address that does not have an owner and no one knows the private key – such as on Ethereum. These coins are not destroyed on their own, but can no longer be accessed, they serve essentially the same purpose as a coin burner.
Although the burning function is usually accessible to anyone with signs or coins for burning, the function is most often used by the company or individuals managing the project.
Despite being a relatively new practice, token burn exercises have already been implemented by major blockchain projects.
Perhaps one of the best-known cases is Binance’s quarterly token burn, in which the world’s largest cryptocurrency spot exchange buys tens of millions of dollars worth of Binance Coins (BNB) from the open market every quarter using a fraction of the trade. fee income. So far, more than 10% of the total BNB supply has been burned, while the value of the token has exploded since its inception.
On the other hand, NewsCrypto – one of the most popular new platforms for novice cryptocurrency traders – has introduced its own unique inclusion in token burn mechanics. The platform offers a number of premium plans that open up additional tools designed to maximize users ’maximum profits, but these can only be purchased in NewsCrypto coins (NWC).
The platform will then burn 20% of these, permanently removing them from supply, while demand for tokens will continue to grow in line with the platform. So far, this system has helped the NWC rise by more than 27% since the beginning of the year – no small feat, given that many cryptocurrencies have struggled this year.
Why burn a token?
Most often, symbolic writings are used to ensure that the entire supply of cryptocurrency remains deflationary – which essentially means that all coins or chips in circulation decline over time. This system increases the scarcity of the asset, which, together with constant or increasing demand, should lead to increased value due to the nature of supply and demand.
On the other hand, some companies, such as those that operate the Tether (USDT) and USD Coin (USDC) stable troms, instead burn cryptocurrencies to ensure that the circulating supply remains in parity with their fiat reserves. When these reserves are replenished or reduced, new coins must be struck or burned.
Token burns are also used by some projects as one of the debugging processes. Back in 2017, Stellar, a popular blockchain used for cross-border value transfers, underwent inflationary exploitation, resulting in 2.25 billion new lumen coins (XLMs) – an increase in XLM’s total offering of more than 5% at the time.
To remedy this, the Star Foundation has equivalent number of chips, bringing the circulating supply back to where it should be. Stellar then again burned 55 million XLMs to halve the total inventory in a further step to reduce XLM availability.