Coin burning, or crypto burn, is a mechanism involving the removal of a specific amount of cryptocurrency coins from circulation. Coin burning is a process that removes crypto coins permanently from circulation, thus decreasing total supply. The act essentially burns a cryptocurrency, taking it permanently out of circulation.
A crypto burn is a process in which a number of tokens of a cryptocurrency are destroyed in order to raise the value of the remaining tokens. It is a method for regulating the supply of a cryptocurrency, and development teams use it. Crypto burns can only increase the value of their corresponding tokens because they impose scarcity.
This act of burning specific crypto assets reduces the supply, making them more scarce. Burning coins lower the supply, making the coins in the cryptocurrency scarcer. Coin burning reduces the supply, making tokens of a cryptocurrency scarcer.
When developers/miners burn coins, it decreases the number of coins available on a digital currency marketplace. Since the coins are neither issued nor controlled by any unified authority, developers/miners burn the coins. To burn coins, miners send them to an unspendable address that is not verified. Then, the total supply of that coin is updated, meaning a specified number of coins are burned forever.
On the Burn Function for Crypto Miners
If a crypto holder does not own enough coins, or the nominated amount is not valid (such as 0, or -5), then the burn function will not run. A cryptocurrency holder will call burn stating they wish to burn the specified number of coins. The burn function will automatically send a specified amount of the coins in circulation to a burn address.
The practice of burning a token can be done (by anyone) by sending it (or any amount of tokens that you are burning) to a frozen private address (also called the burn address), which, if it is valid, is the address where no coins can ever be recovered. When a token is sent to a burn address, it is permanently lost. A fixed amount of tokens is typically taken from gas fees paid by a transactor and is forwarded to a burn address.
Token burn involves restricting the number of miners that are allowed to control the number of burnt tokens. Token burning does not necessarily reduce the total amount of outstanding tokens in circulation either, since the amount of tokens in circulation seems to be quite volatile.
If the coin has a finite supply, which is getting close, developers might be reluctant to perform large burns. For it to have an impact on the price, it would take a significant amount of a cryptocurrency’s value to burn, rather than a small number of coins.
Why Coin Burning Is Performed
Coin burning is done to cause supply constrictions, thus creating artificial upward pressure on a token’s price. The best-known advantage is that token burn can increase the token’s value. The respective rise in the value of each unit of XLM shows that token burns affect the price of a coin, at least in the short run. What the burn does is, as fewer tokens are burned, the value of each existing token increases, giving an increased value to the holder of that token.
Here, every time the cryptocurrency holder makes a transaction using the token rather than paying a transaction fee to a miner, the fee value is burned from circulation.
While a gas fee guarantees legitimate transactions will take place, burning out a small amount guarantees the token will retain its value. Coin burning is used to raise and stabilize the prices of coins and tokens, deliberately reducing the total amount in circulation. Burning occurs as tokens are retired, which adjusts the circulating supply and keeps balances stable. The coins are rendered inoperable, relegated to the sidelines beyond available supply, for all practical purposes.
In the world of crypto, to burn a token is to intentionally remove the token from circulation, usually by sending it to a crypto wallet to which nobody has access. Token burning is a strategy followed by cryptocurrency projects to affect the price of the token, or coin, on the market. Token burning is typically carried out by a team of developers working on a specific cryptocurrency asset. The decision of whether or not to burn a token is generally left up to the development team behind a coin.
Who Burns Tokens and Why
Tokens are typically burned by the dev teams behind cryptocurrency tokens and NFTs, mostly for deflationary purposes. Burning tokens, in both case NFTs and cryptocurrencies, means taking them off of the blockchain and making them inoperable. The burning of cryptocurrency tokens is recorded in the blockchain, so investors can see burns and verify that tokens were removed from the blockchain.
Each crypto network defines the protocol for performing a burn, but this amounts to linking coins in circulation to private keys that cannot be obtained, so that no one can claim it is theirs. Here’s a look at what it means to burn coins.
This is the act of sending cryptocurrency tokens into a wallet without an access key. Burning cryptocurrency coins involves moving a group of coins or tokens into a wallet that is capable only of receiving funds, and cannot send funds to it (also known as the burner address, or eater). Cryptocurrency burning occurs when a cryptocurrency token is deliberately sent to a non-usable wallet address to take it out of circulation.
Coin burning is the process whereby miners and developers of digital currencies may withdraw tokens or coins from circulation, thus slowing down the inflation rate or decreasing the total amount of coins in circulation, according to The Motley Fool. While different schemes for burning exist for different cryptocurrency projects, the general effect is generally the same, with the destruction of tokens decreasing the circulating supply.
Another scheme essentially strips a token of the available supply, increasing its relative scarcity. Without the private key, a cryptocurrency token cannot be accessed by anyone and is lost for good. Edul Patel, CEO & Co-Founder, of Mudrex, says that burning is done mostly to keep a lid on the value of a coin.