Crypto burning is a deflationary and bullish practice to decrease the circulating supply of a coin or a token.
Burning of crypto coins helps to maintain balance, protect against spam, and support token value.
Crypto projects burn a portion of their supply as a one-time event or periodically to attract investors and stabilize token value as the burning of crypto reduces circulating supply which mostly results in increased price of the token.
Crypto burn serves as a mechanism in Proof of Burn networks, stablecoins, and wrapped tokens contributing to their functionality and ecosystem.
What is crypto burning?
Burning is used to describe the complete removal of a portion of a cryptocurrency token supply.
The measure is mainly used as a deflationary measure to support the value of crypto assets.
It is based on the demand-supply philosophy where as the supply is reduced the price increases for the same level of demand.
Crypto burning is akin to stock buybacks and at times crypto buybacks are also done to decrease supply and support prices.
The process of crypto burning involves the transfer of the tokens to a burn address(eater address), which represents a crypto wallet from which it can never be removed.
The wallet does not have private keys and tokens sent to such wallets are permanently destroyed.
Once the burning is confirmed, and transaction verified, it is recorded on the blockchain, and the total supply is updated.
Strategic analysis of crypto burning
The main purpose is to increase the value of a particular token by reducing the supply in circulation.
The scarcity induced due to the deliberate removal of tokens from circulation drives demand for the remaining tokens.
Crypto burning also helps to breathe life into projects that have stalled as a well-executed token burn can drive excitement around the project and amplify trade volumes. This excitement can salvage many projects.
Token burns can act as a great equalizer, ensuring equality in distribution and governance within a decentralized project by incinerating the accumulated tokens and fees and limiting the project’s team from hoarding the lion’s share. This hinders the manipulation of control by any single party.
The crypto burning boosts investor confidence as it shows projects’ commitment to maintaining value, supporting growth, and attracting new supporters.
It also helps in improving the market perception improving trading liquidity and helping the project regain its competitive edge. It further opens doors for growth and expansion through collaboration or integration.
The increased token value as a result of token burns may motivate inventors to hold to their coins ensuring a healthier ecosystem.
The process involves the decision made by the cryptocurrency project to burn a specific number of tokens, which are sent to be burned to the burn address and are permanently removed for circulation.
The impact of crypto burning results in a positive effect on the price of remaining tokens benefiting token holders and project sustainability.
In one case, Ethereum implemented a fee-burning mechanism which resulted in cryptocurrency turning deflationary.
Even if the burning of coins may seem counterintuitive, whether in historical instances or even in traditional financial systems.
In many instances, governments have historically recalled and destroyed physical currency notes to control inflation and to introduce new denominations.
It has brought many positive effects in the form of reigning in inflation and altering the supply of money.
Conclusion
Even though crypto burning seems counterintuitive, it has proved its benefits in the market. It has salvaged many lackluster projects and stabilized many cryptocurrencies from inflationary tendencies.
Even in the future, we may see many more coin burnings, which will be strategically implemented to achieve the project’s strategic aims.
