Understand token-burns and why they are so popular for crypto projects

Understand token-burns and why they are so popular for crypto projects

The cryptocurrency market has experienced a boom in the past decade, whereby many tokens have a value of billions.

In such an exponential growth of the market, many would assume that many of the thousands of tokens fail or continuously lose value, but this rarely occurs, especially with the top 100 tokens. The value of some of these tokens is checked using token burns.

Since the beginning of the cryptocurrency, many projects have taken over this mechanism in order to bring about an artificial shortage of the tokens and thus raise the price. But this not so new concept is becoming increasingly popular because it is supported by many crypto communities and users.

Nevertheless, the process of burning to the project differs and it is important to fully understand how to burn to the token of a project and what it means. In this article below we deal with what a cryptocurrency burner is how it works, the history of the token burn and some practical examples of how earlier token burns were carried out.

What is a token burn?

token-burns or simply "burning" is a mechanism that crypto projects use to permanently remove/destroy a number of tokens from the existing circulating token supply. This usually happens by sending the number of tokens to a burn address, which is a digital wallet that nobody can access because it has no private key. This reduces the number of tokens in circulation, blocks it for eternity and prevents someone from being able to access what leads to a "deflationary" event.

The main reason for burning token is to increase the value of the remaining tokens. This follows the economic principle of supply/demand, whereby a lower range of tokens in circulation leads to a shortage of assets with the same (or increasing) demand; Therefore, the asset achieves a higher price.

Conversely, the price of the financial value could decrease if the number of tokens in circulation is increased if the demand remains.

The burning of token leads to scarcity, and in return the value of the wealth value could increase and people act with it. In addition, token-burns are also welcome new investors, as they are seen as a bullish indicator that boost demand again.

Over the years, several projects have been created, including Ethereum, Binance Coin (BNB), Shiba Inu, Sweat Economy and hundreds of others, used this method to increase their value. Even if the burning of tokens can be considered bullish, this does not always affect the price immediately, since some token burns take place automatically and take place regularly or are announced long in advance. This means that the price is effectively determined long before the token burn.

The meaning of token Burns

As already mentioned, token-Burns are an effective way for crypto projects to reduce the overall range of tokens in circulation. A reduction in the offer makes it scarcer and potentially more valuable, which could lead to a positive feedback loop in which prices rise and more investors jump on the train, which further increases demand.

Finally, some projects apply a defined schedule for burning the tokens, the proof-of-burn (POB), one of the consensus salgorithms that ensure that all participating nodes in the network validate the status of the blockchain. POB is based on the principle that miners and sometimes investors coordinate about the destruction of these tokens. After burning, Miner is given the opportunity to shape the same proportion of the burned tokens.

An important example is the latest governance vote of Sweat Economy, which made it possible to coordinate investors and token owners, whether $ 100 million sweat tokens are to be burned or distributed to existing token holders.

Examples from the practice for token burns

As explained above, the burning of token is almost similar to cryptocurrency itself. In fact, some of the earliest and most successful projects used token to burn token as part of their strategy. In the following we discuss some examples from practice for some of the most famous token burns in the history of cryptocurrency:

"error" Burning

Even if it usually remains unnoticed, error burns are one of the most popular types of burning tokens. For example, Bitcoin is probably the first and best-known example of these "errors" burns. Whenever a user loses his private keys or sends the tokens to an inaccessible (invalid) wallet address, these BTC are effectively burned, since they can never be accessed forever. According to estimates, over 4 million BTC were effectively burned, which is 20 % of the total offer.

Casing and destruction (Binance Coin)

Binance Coin (BNB) The Burn Plan contains a buyback and burn mechanism in which the project uses part of its income or profits to buy and destroy tokens from the market. This increases demand and reduces the supply, which leads to an upward pressure.

In the introduction of BNB in ​​2017, the obligation was received to pull 100 million BNB (half of the overall offer) out of circulation by a burning process. The last burn (23rd burn) amounted to 2,020,132.25 BNB (~ 676.744.304 $).

Fee burning (Ethereum)

as an Ethereum by Proof of Work (Pow) on his Proof of Stake (POS) consensus Consalithm Change, the community decided to burn part of the fees taken. The EIP-1559-update introduced in August 2021 burns ether from the fees that are valid in the validation and verification of the network.

governance burn (sweat-token)

governance in the crypto area has existed since the introduction of decentralized autonomous organizations (DAOS) in 2015, which give token owners the power about decisions about the progress of the platform. While some token burns are planned, platforms like Makerdao have the community decided whether it should be destroyed or not.

From the available token-burn mechanisms, governance voting token-burns represent the most trustworthy and interesting type of token-burns. The community simply consumes in a democratic way about whether and how many tokens should be burned.

One of the interesting token burns through decentralized governance votes recently is the governance vote of the sweat token in April. In contrast to other combustion plans, which coordinate exclusively by the burning of tokens, SWEAT has introduced a coordination between token and distribution governance that enables the community to coordinate whether 100 million sweat tokens are to be burned or distributed to users with a 12-month growth glass.

As expected, the community was split when it came to opting for one of these two options. Since 153,783 users took part in the vote, 91,481 users (59.487 %) voted for the distribution, while 62,302 users (40.513 %) voted to burn token. In a unique vote, the 100 million sweat tokens were divided into the decision of the voters, whereby 59,541,465,013 sweat were distributed and $ 40,975.987 sweated.

"It was cool to have the coordination in the app and make the results transparent. Next time I would like to have a contract for safety

nftb, an NFT protocol based on the BNB chain, carried out its first DAO sanctioned token burn in January, so that the community was able to decide how much NFTB would like to burn the protocol. The community had to choose which proportion of the overall offer should be burned, with the selection between 5 %, 15 % and 25 %. The community decided to burn 25 % of the tokens, which led to a quadruple of the price.

algorithmic stable coin token burns (Terra Stablecoin, VAT)

Algorithmic stable coins also carry out automatic token burns to control the stock of their tokens. For example, if the demand for an algo token increases and the price loses its bond and increases over $ 1, the platform automatically shapes new tokens and floods it on the market until the price drops to $ 1. Conversely, if the demand for a token drops and the price falls below $ 1, the platform automatically buys tokens and burns it until the price rises to $ 1 again.

One of the best-known algo stable burns is Terra's VAT token, which exploded in early 2022. In order to maintain the price stability of VAT, the Terra network used its native cryptocurrency Luna. If the price of VAT increases over $ 1, users could burn luna tokens to shape VAT, which increases the offer and effectively brought VAT back to $ 1 and vice versa. However, when Luna's price broke in mid-2022, VAT also fell and lost more than $ 60 billion in investors.

meme coins (Shiba Inu)

The recent time growing interest in meme coins such as Dogecoin, Shiba Inu and Pepe has meant that some projects have decided to destroy their tokens in order to reduce their excessive offer. At the end of the last month Shiba Inu (the second largest Meme Coin) announced that it completed its largest daily token burn to date on May 24, with the record number of 41 million Shib tokens, which were sent to the Burn address in one day.

Shiba Inu has burned an interesting timetable schedule for the combustion rate In May 2021, Vitalik decided to destroy about 410 trillion Shib tokens (or 40 % of the total Shib offer), which marked one of the greatest moments in the tokens. After Vitalik burned the Shib tokens, the prices for Shiba Inu rose by almost 40 %.

conclusion

Burning token is a powerful mechanism that can create value and benefit for crypto tokens.

By reducing the offer and increasing the demand for tokens, burning token can increase their price and scarcity. Nevertheless, the token burning poses potential risks, for example when whales take advantage of the token combustion by selling their tokens as soon as the token price shoots up something that affects the increase in the value.

In addition, some non -trusted platforms can put their community under pressure and promise to destroy tokens. In reality, however, they send the tokens to an accessible wallet.