What does burning crypto mean? This article unravels the concept of permanently removing digital assets from circulation. Understanding this process becomes crucial as the crypto landscape evolves. We touch on the mechanics, purposes, and impact of burning crypto.
We’ll also explain how to burn crypto and what are the different types of token burning. We’ll finish this guide by listing the main pros and cons of burning cryptocurrencies.
What Does Burning Crypto Mean?
The crypto burn meaning can be explained as the process of removing a portion of a certain digital currency to reduce its total supply. If the total supply of a coin decreases, its demand will increase, which will lead to a growth in its value.
Token burning is also a deflationary event. You’ll notice that some crypto developers regularly burn their tokens. By doing this, they’re trying to convince investors that the total supply of their coins will continue to decrease — their coins will not lose value.
That said, the goal of crypto burning is to balance the difference between demand and supply. Although crypto burning isn’t the only factor that will affect the volatility of cryptocurrencies, it will affect the dynamics of the market.
What Happens When Crypto is Burned?
To receive or send digital coins, you must obtain a crypto wallet. When a coin burn occurs, you’re sending your digital assets to a wallet that can only receive them. These wallets are also called burner or eater wallets. After your coins end up in burner wallets, you won’t be able to access them.
Proof-of-burn is the main consensus mechanism used for burning tokens. This mechanism makes sure that all transactions are valid. Likewise, PoB enables the mining of new coins. The most popular examples of crypto-burning projects are Ethereum, Shiba Inu, and Binance Coin.
What Does Burn Rate Mean in Crypto?
The burn rate term refers to the speed at which coins are withdrawn from circulation. Burn rates will also affect the prices and scarcity of digital coins.
On that note, a higher burn rate can increase the value of coins. On the other hand, a lower burn rate will not have a big impact on the overall price of crypto tokens.
How to Burn Crypto
The burning process includes the use of protocol mechanisms or smart contracts that recognize and take out a certain number of coins from circulation. These coins are then sent to wallets with no keys — no one will be able to access them.
If you want to burn your tokens, you must first determine the number of tokens you want to burn. Then the smart contract will check if the specified amount is valid. Keep in mind that you can only burn positive numbers. After the validation process, the specified number of coins will be deducted from your wallet.
However, if you have specified the wrong number of tokens, the burning process will fail.
Crypto projects can use three different burning methods:
- Crypto coin burn schedule: Developers schedule their burning processes. This method is used by Binance.
- Transaction-based burns: This method refers to the burning of small portions of coins during transactions. This method is used by Ripple.
- Milestone-based burns: A certain portion of coins gets burned after a specific milestone is reached.
Why Burn Crypto
There are several reasons why tokens get burned. The main reason is to increase their demand — value. However, burning tokens also protects against spam and promotes mining balance.
Increasing the Value of Crypto Coins
Unlike fiat currencies, which have a centralized nature, cryptocurrencies are decentralized. This means that certain coins have a fixed supply. This is why a decrease in the total supply will result in greater demand.
As mentioned before, higher demand equals higher prices. This is why we have Bitcoin halving that happens every 4 years. After each halving, the total supply of BTC decreases, causing its value to increase.
Many crypto developers are trying to imitate BTC’s demand and supply dynamics by burning their tokens.
Protection Against Spam
Token burning protects the network from DDoS attacks. DDoS attacks refer to flooding the network with a large amount of insignificant traffic or spam. It also prevents unwanted transactions that can slow down the network. How? By automatically burning a certain number of tokens during transactions. This method is notably used by Ripple.
Promoting the Mining Balance
The PoB consensus mechanism maintains a balance between new and established miners. Namely, the mining speed decreases every time a new token is created. This gives established miners a certain advantage over new miners.
Other reasons why developers burn their coins are:
- To control inflation
- Reward holders
- Increase credibility
- Encourage participation
Types of Token Burning
The three main types of burning tokens are:
- Burning at the protocol level
- Burning as an economic policy
- Burning instead of dividends
Burning at the Protocol Level
Burning is an integral part of networks that use the PoB consensus. This means that it’s built into their protocol and that it will be active as long as its coins are in function. The PoB consensus protects the blockchain from spam by burning a portion of tokens during each transaction.
Burning as an Economic Policy
Developers can burn their tokens to control their supply. For example, many developers regularly burn their unsold ICO tokens to sustain a certain level of supply.
Burning Instead of Dividends
Some developers use the burning method as a type of dividend to reward users who hodl their tokens. For example, if a token owner has a certain business, such as a crypto exchange, they will be able to get rewards by burning their tokens. This can be very beneficial for hodlers.
Pros and Cons of Burning Crypto
So, what does burning crypto mean? To sum up, crypto burning refers to the destruction of a certain amount of tokens to increase their demand and reduce their total supply. The burning process involves sending an even number of tokens to the burner or eater wallets. Assets that are sent to these types of wallets will not be available to anyone.
The token-burning process uses the PoB consensus mechanism, which also enables the mining of new tokens. The main reasons why developers burn their coins are to increase the value of their coins, increase credibility, and encourage participation.
What happens to a cryptocurrency when it runs out of its circulating supply?
Is burning crypto good or bad?
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Does burning crypto increase value?