While it may seem harsh to burn a financial instrument, burning crypto tokens is typical.
Token burning is a tactic used by cryptocurrency projects to manipulate the market rate of a token or coin. This is achieved by removing some tokens from exchange forever. Although the big cryptos (Bitcoin and Ethereum) do not have token burning mechanisms, many powerful Altcoins do.
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Binance, for example, has set a goal of burning 100 million BNB tokens, with USDT Tokens (provided by Tether) and XRP currencies following suit (issued by Ripple).
What is the procedure for burning tokens?
The process to remove a certain quantity of a token from existence is known as token burning.
One of the most common ways for crypto projects to perform a burn is to purchase a specific number of tokens from the market and remove them from circulation. These tokens are subsequently transferred to a Burn address, which is a frozen personal address.
Because there is no private key attached with the burn address to which the tokens are sent, it can never be retrieved. The asset is no longer in existence; it has been “burned”.
The Binance Quarterly Burns are a good example, with the most recent in July 2020. Since the start of the Quarterly Burns, the fire has burned about $60 million in BNB tokens.
Ripple, a popular digital asset, performs the same thing, but in a different way. It restricted the number of transactions that can be made on its network, reducing the risk of a DDoS assault (which disrupts the regular traffic of service, server or network).
Another method is to use the fees as “gas” to make a transaction go quicker than anticipated. With each transaction, the supply of XRP floating on the market is reduced.
Another cryptocurrency business, Stellar, decided to burn 55 billion XLM tokens to boost the coin’s value. This blaze effectively cut XLM supply by more than half.
In the near run, the price effect on XLM was substantial, moving from $0.069 to $0.088 in a single day (around 25 per cent from November 5th to November 6th).
Even stablecoins like USDT, GUSC, USDC, and HUSD have burned over $2.8 billion in their lifetimes. This ensures that the reserves are transparent once monies are added or retired. Tokens are produced when a deposit is made in reserves. Whenever the coins minted into the reserve are extracted, the circulation supply is regulated, and the balance is maintained.
So what were the advantages of burning tokens?
Token burns have several advantages
The most well-known advantage is that token burns can raise the value of a coin. The XLM example given earlier is a solid starting point. Token burns affect the value of a coin, at least in the near term, as evidenced by the increase in the value of each XLM unit. However, like many other tokens, XLM plummeted during the Coronavirus crash. Still, it has since recovered, reaching $0.10 in July of the same year.
In the instance of XRP, this is the case. The token’s value remains stable due to the ongoing burning, and it also wagers on a long-term price gain. From November 2019 to August 2020, the price has stayed at $0.28 to $0.31, based on the exact measurements and the same crashing factor.
Because the value of community members’ tokens increases, you could claim that token burning constitutes a type of airdrop from the perspective of society. Project X, for example, performs a token burn. Following that, the supply is reduced, and the token’s value rises by 10%. As a result, every society token holder’s token is worth more than before the burn. As a result, Mr Y, who owns 1,000 units of Project X tokens, would have seen a 10% increase in the value of his assets, even if he still owns 1,000 units.
In other words, Project X just did an airdrop to every token X holder who didn’t have to pay a dollar to raise the price of their holding. Perhaps this is among the reasons why relevant stakeholders are drawn to initiatives that disclose token burns regularly. This is also one of the marketing strategies used by several projects.
A critical component is trust and faith in the project. This is where, for instance, once the token or currency is fully published after the ICO, the burning procedure is commonly done to provide potential buyers with the assurance that an over-recirculation will not harm their funds. Furthermore, limiting the circulating quantity of a fraction of a cryptocurrency’s circulation, such as the XRP example we covered before, reduces the number of transactions by the same amount. In a word, lowering the volume reduces the risks of a spam attack while still allowing enough capacity for the network’s health transaction count.