Many developers aim to boost the value of their crypto projects to benefit investors. They do this by reducing the circulating supply of crypto assets through a process called token burning.
This article explains in detail all you need to know about token burning and how it works. Keep reading to learn more.
Understanding Token Burning
Token burning involves permanently removing a specific number of tokens from the circulating supply. The ‘burned’ tokens are sent to a unique wallet address, which only receives crypto assets but cannot transfer them out, thus making them inaccessible forever.
As mentioned, this process is intended to increase the value of cryptocurrencies. The idea is that, by reducing the circulating supply, scarcity is created, enabling the remaining tokens to rise in value provided the demand remains constant or increases.
Token burning is similar to the buyback approach employed by traditional companies, where they repurchase their shares in an effort to control the circulating supply.
How Does Token Burning Work?
There are a series of steps involved when removing tokens from circulation. They include:
1. The Decision to Remove Tokens
Governing bodies or project developers make the decision to remove a certain percentage of the circulating supply of crypto assets for various reasons. It could be due to a change in economic strategy or attempts to enhance scarcity.
It is worth mentioning that some crypto projects come with built-in burn mechanisms designed to automatically burn tokens over time. For instance, BNB has a token-burning mechanism, which removes a specific amount of tokens from circulation every three months. This helps to increase scarcity.
2. Identifying Tokens to be Burned
After agreeing to burn tokens, project developers must decide the token amount to remove from the circulating supply. Once they decide, they’ll check if their wallet has enough tokens to be burned. If not, the token’s smart contract will not execute the burn.
3. Transferring Tokens to a Burn Address
If there are enough tokens to burn, the project developers can then send them to a burn address, also known as an eater address, making them permanently inaccessible. To transfer tokens to that address, one should press on the ‘burn function’ in their wallet.
4. Verifying the Token Burn on the Blockchain
Like any other crypto transaction, a transfer to a burn address is recorded on the blockchain and can be viewed by anyone. So, as a project developer, it is important to announce the token burn to your community members and send them a link to the onchain data for verification purposes.
Why is Token Burning Important?
While burning tokens worth millions may not sit right with many, there are several reasons why this process is critical for crypto projects. These reasons include:
Boosting Investor Confidence: Periodic token burns help to build investor confidence as they demonstrate developers’ commitment to the project’s long-term growth.
Error Correction: Developers can burn tokens to correct an error. For instance, if a bug causes an unintended minting of extra tokens, then the project developer can burn the surplus to avoid destabilizing their crypto asset.
Stabilizing Algorithmic Stablecoins: Issuers of algorithmic stablecoins use the mint-and-burn mechanism to keep their currencies stable. They mint more tokens if their stablecoins go above the intended prices and burn the circulating supply when the prices drop to bring the stablecoins back to the desired levels.
Enhancing Security: Burning tokens can help safeguard a blockchain network. For instance, blockchains that burn a portion of the collected transaction fees discourage spam transactions and block bad actors from launching DDoS (distributed denial-of-service) attacks.
Earning Mining Rights: Developers can gain mining rights on blockchains that employ the proof-of-burn consensus algorithm. Here, miners are required to burn a specific percentage of their tokens to mine blocks and receive rewards.
Conclusion
Are you planning to launch a crypto project? If so, employing a token-burning mechanism is vital to showing your commitment to the long-term success of the project. As mentioned, this will help you enhance investor confidence.
