Burning is a crucial element in the cryptocurrency and blockchain ecosystem. It offers a way to manage circulation supply, ensure value proposition, and achieve sustainability. However, as burning has several benefits including counter-inflation and value increment, it also comes with drawbacks like removal of crypto supply which can not be recovered. All those crypto projects seeking long-term development generally consider crypto burning a novel strategy for unlocking economical as well as social benefits.
If you are new to crypto space, it could be stressful to figure out what is crypto burning and its purpose. In this blogpost, we decipher the term and its far reaching effects in the crypto ecosystem.
What is Crypto Burning?
Crypto burning is the process of diminishing supply of a cryptocurrency by removing excessive amounts from circulation.
Under this method, cryptocurrency tokens or coins are sent to a non-recoverable blockchain address and they are permanently removed from the circulating supply. Once cryptocurrency is sent to these addresses, they become inactive and can not be accessed furthermore. All these on-recoverable addresses are also called ‘dead addresses’ that have no owners.
The burning events are generally performed by the developers’ team behind a particular cryptocurrency asset. It is a similar process to buyback in the stock market where companies purchase their own stocks from the open market & effectively cancels them out. As the burning process reduces the supply, the value of existing cryptocurrency in circulation increases due to scarcity.
The trend of burning cryptocurrency became popular in 2017 and 2018 when multiple crypto companies – including Binance – started burning their native cryptocurrency to cut market supply and boost its prices. It has now become a common strategy for developers with several newer crypto projects starting out with massive token supply and burning them.
How Crypto Burning Works?
The process of burning is carried out by sending the excessive cryptocurrency supply to so-called “burn addresses.” These addresses can be seen publicly on the blockchain but its contents are unavailable to anyone. Any address on a blockchain network can be assigned as a burn address by making sure that it can not be accessed anytime in future.
On Ethereum and other EVM-compatible blockchain networks, both addresses:
0x000000000000000000000000000000000000dEaD
and 0x0000000000000000000000000000000000000000
are popular burn addresses. The one with 00 at end is by default the official burning address while ‘dEaD’ address is customized to be a burn address by the Ethereum developer community.
Why is Cryptocurrency Burned?
The burning of cryptocurrency can be done with different purposes but mostly it is used to deflate the circulating supply. The decrease in circulating supply tends to drive market prices higher for that particular cryptocurrency. Thus, this event is more often sought after by investors, traders and the community of a crypto project.
Another need for burning is to maintain the market supply of specific cryptocurrency which serves certain uses. For instance, stablecoins are pegged to the value of particular assets like any currency or metals. Here, the supply of these applications-specific cryptocurrency is preserved by burning and minting new supply continuously. Similar to stablecoins, Wrapped Tokens and Synthetic Assets are also burned when their value is transferred back to the original assets.
Also read: What is Tokenomics? Inflationary & Deflationary Tokens
Benefits of Crypto Burning
The burning of native cryptocurrency or token brings several benefits to a particular crypto project. It directly contributes to the overall stability and long-term sustainability of that project’s ecosystem. Below are some major benefits of crypto burning:
Sustainability
Burning contributes to the stability of the crypto ecosystem which in turn supports long-term sustainability. As burning removes coins from circulating supply, the demand-supply dynamics improves and it favours positive growth of the project. This decreased supply also helps in reducing major price fluctuations which leads to to more predictable market movements.
Price Uptrend
As the coin burning reduces circulating supply from the market, it leads to an increase demand for that cryptocurrency. Such a scenario leads to market price uptrend as more people will be willing to pay higher to acquire cryptocurrency. This method of burning unlocks most benefits for cryptocurrency which are high in demand and has strong utility.
Long-Term Commitment
With the coin burning, developers could attempt to encourage long-term investment through the prospect of value appreciation. This event shifts short-term speculation away and helps in stabilizing the cryptocurrency for a more sustainable future.
Community Trust
Burning demonstrates developers’ commitment in managing project ecosystem, token supply and promoting its value. It also gains credibility among community members by aligning incentives for participating in the burning process. Among all, the most consistent and transparent coin burning events can build trust within the community.
What is Proof-of-Burn (PoB)?
Proof-of-burn (PoB) is a consensus mechanism for blockchain networks. It requires node operators of that blockchain to burn a portion of their crypto holdings to become validators. In exchange for burning their holdings, validators are offered exclusive rewards as they secure the blockchain network and broadcast blocks. Proof-of-Burn combines both Proof of Work (PoW) and Proof of Stake (PoS) mechanisms and is regarded as one of the experimental consensus mechanisms to achieve energy efficiency.
Conclusion
In this wide industry of blockchain, supply and inflation are issues faced by every major crypto project. Assets like Bitcoin have a deflationary economic model where assets are controlled by decreasing the frequency of circulation supply. However some projects have unlimited crypto supply and the inflation within this project increases over time. To counter this issue, the strategy of Crypto Burning is used which attempts to maintain the circulation supply and gives a boost due to the project’s economy.
You can also read about the Crypto Industry.
