If you're new to the world of crypto, and you've always wanted to know what crypto coin burning is, and why some crypto projects do this, this is the article for you.
Crypto coin burning is the process of permanently removing a portion of a cryptocurrency's supply from circulation.
This means that the burned coins can no longer be used or traded by anyone.
To burn coins, they are sent to a special address that has no private keys, so no one can access them. This address is called a burn address or an eater address.
Why Do Crypto Projects Burn Coins?
There are several reasons, such as:
- To manage inflation: By reducing the supply of coins in circulation, coin burning can help prevent the value of the cryptocurrency from decreasing due to oversupply. This can also increase the demand for the remaining coins, which can boost their price.
- To increase value: By creating a sense of scarcity and reducing the total supply of coins, coin burning can make the cryptocurrency more valuable and attractive to investors and users.
- To align incentives: By burning a portion of the transaction fees or rewards, coin burning can help align the incentives of different stakeholders in the crypto ecosystem, such as miners, developers, and holders. This can also increase the security and efficiency of the network.
- To prove commitment: By voluntarily burning their own coins, crypto projects or communities can show their commitment and confidence in their cryptocurrency. This can also create a sense of shared ownership and responsibility for the project.
Some examples Of Coin Burning Are:
- Shiba Inu (SHIB): SHIB is a meme token that gained popularity in 2021. It has a total supply of one quadrillion tokens, half of which were sent to Ethereum creator Vitalik Buterin's wallet. Buterin burned 90% of the SHIB tokens he received and donated the rest to charity. This reduced the circulating supply of SHIB by 410 trillion tokens and increased its scarcity and value.
- Ethereum (ETH): ETH is the second-largest cryptocurrency by market capitalization and the native currency of the Ethereum network. In August 2021, Ethereum implemented a major upgrade called the London hard fork, which introduced a fee-burning mechanism. With this mechanism, a portion of the transaction fees paid by users is burned, meaning that it is permanently removed from circulation. This reduces the inflation rate of ETH and makes it more scarce and valuable.
- Binance Coin (BNB): BNB is the native token of Binance, one of the largest cryptocurrency exchanges in the world. Binance has a quarterly coin-burning program, where it buys back and burns BNB tokens from the market using its profits. This reduces the total supply of BNB and increases its value. Binance plans to burn 100 million BNB tokens, which is half of its total supply.
As you can see, crypto coin burning is a popular mechanism used by crypto projects to manage their supply and value.
It has several benefits and drawbacks, depending on various factors such as the technology, community, and market conditions of each cryptocurrency. Coin burning is not a guarantee of success or failure for a cryptocurrency project, but it can have a significant impact on its performance and perception.
The Bitcoin Factor
One of the key principles of economics is that the value of something depends on its supply and demand.
The lower the supply and the higher the demand, the more valuable it is. The higher the supply and the lower the demand, the less valuable it is.
This applies to cryptocurrencies as well. When you want to invest in a crypto project, you should always check how many tokens are available and how many will ever be created.
This will give you an idea of how scarce and valuable they are.
For instance, Bitcoin has a limited supply of 21 million tokens.
This means that there will never be more than 21 million bitcoins in existence.
If you think about it, this means that only 21 million people in the world can ever own one whole Bitcoin. That makes Bitcoin very scarce and very valuable.
Because Bitcoin is the first crypto, it sets the standard by default. When some crypto projects attempt to burn their supply, in the long-run they're trying to make their project more valuable with a limited supply.