How does Token Burning Work?: A Comprehensive Guide to Understanding this Crypto Phenomenon

There are many different types of crypto tokens available on the market today. For example, Bitcoin has a finite supply and is synonymous with commodities like gold. Ethereum is another popular crypto token. It has an infinite supply and enables smart contracts. The most vital factor that affects the token’s value is its availability. Token burning helps to increase the price of a crypto token by controlling its supply. This article will help us understand what token burning is and explore its merits and demerits.

What is token burning?

One of the most vital concepts in economics is the law of supply and demand. This concept states that the price of an asset depends on its supply and demand. Token burning is a process used to increase the price of a crypto token by controlling its supply. This process involves sending crypto coins to a wallet without private keys. This wallet is programmed to receive crypto tokens. Crypto tokens sent to this wallet become inaccessible. The price of a crypto token increases when the supply is reduced, and the demand remains constant.

The process of token burning is a community effort. A community of crypto holders burns a small number of tokens individually, which together amounts to a large number. Therefore, impacts the price of a crypto token positively.

How does token burn work?

Crypto tokens are lost forever once they get burned. Users should check the amount carefully when they choose to burn crypto tokens. They should also ensure these crypto tokens are being sent to a wallet without private keys.

The essential part of the token-burning process is the proof-of-burn consensus mechanism. This mechanism verifies and validates each burn transaction. These burn transactions can be tracked using the blockchain explorer. Similar to other consensus systems, it is used to ensure there are no fraudulent transactions. This mechanism also allows miners to create new crypto coins, as many miners must first burn coins to mine them.

Process of token burn

There are two methods to burn crypto tokens. Some networks, such as Binance, have a “burn” feature available to their users. First, Smart contracts check if the user has enough crypto tokens to burn. Next, these tokens are subtracted from the available crypto tokens and burned permanently.

The second and most widely used method to burn crypto tokens is to send crypto tokens to a wallet without private keys. Burnt tokens are removed from circulation. Even though they are not destroyed, they cannot be retrieved ever.

Examples of token burning

Many tokens have been burned using the crypto token burning process. For example, over four million bitcoins are estimated to have been burned. Many other crypto tokens have been burned, including Ethereum and Shina Inu.

BNB

The Binance network has an automated burn feature that automatically burns a certain amount of crypto tokens every quarter. The latest BNB burn took place on October 13, 2022. About 2,065,152.42 BNB were burned, with a total value of $574,800,583.92 at the time of the burn.

Ethereum

Ethereum’s burning mechanism removed around 1.3 million ETH from its circulation in 2021. This burn was a part of the EIP-1559 protocol, which took Ethereum closer to The Merge.

Shiba Inu

The Burn Portal of Shiba Inu was introduced in 2022 to enable its community to burn crypto tokens. The SHIB community sent half of their entire coin supply to Vitalik Buterin. He burned close to 90% of the crypto tokens he received.

Pros and cons of token burning

Pros

Maintaining the price

Removing crypto tokens from circulation helps to increase their price. In return, crypto investors accrue more wealth.

Building a robust community

Deflationary crypto assets become rare over time, making it difficult to get hold of them. Limited supply drives the crypto community to show interest in acquiring more tokens.

Cons

Lost opportunities

A user should be prepared for the crypto token’s price to go up after a burn. Burned crypto tokens can never be recovered.

A large number of tokens need to be burned to make an impact.

About 500 trillion Shiba Inu crypto tokens worth $7 billion, were burned by Vitalik Buterin during the burning process.

Conclusion

Crypto token burn is a unique process to increase the price of a crypto asset. This process works on the principle of the law of supply and demand. There is no guarantee that crypto token burning will increase its price. You should research previous burns when considering burning a specific crypto token. Users should exercise caution when burning crypto tokens, as once burned, they are lost forever.

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FAQs on token burning

What is Token Burn?

Crypto token burning is a process used to increase the price of a crypto coin by controlling its supply. This process involves sending cryptos to a wallet without private keys. These crypto tokens are inaccessible once sent to this wallet. The price of a crypto asset increases when supply reduces and demand remains constant.

What are the different ways of token burning?

There are two methods to burn crypto tokens. Some networks, such as Binance, have introduced a “burn” feature for their users. Users can use this feature to burn their Binance coins. The most popular way to burn tokens is by sending cryptos to a wallet without private keys.

Which tokens have been burnt in the past?

Many notable crypto tokens have been burned, such as Bitcoin, Shiba Inu, Ethereum, and BNB.

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