A process where you permanently remove cryptocurrency and it’s taken from the circulation is called token burning. Basically these tokens are sent to an address where they are never accessed by anyone.
Usually it is called a burn wallet. This makes the tokens, scars and unusable. That’s why the cryptocurrency gets reduced supply of these stocks. It’s like a company decides to buy back all of its shares and then toss them away never to be accessed again.
Working of token burning
The token burning project is basically there to identify the complete number of tokens that needed the burning. That’s why these tokens are immediately sent to the burn address where they are transferred into the burn wallet. Basically this address is a public wallet without any kind of private key.
As approved the transaction gets recorded in the Blockchain. Once you burn the tokens, you cannot retrieve or spend them.
Reason behind burning tokens
There are certain reasons due to which the tokens are burned. Let’s take a look at all of them.
● Counter inflation
● Scarcity
● Reward holders
● Confidence booster
● Mechanisms that require deflation
Counter inflation
When you burn cryptocurrency tokens, then its supply is reduced. Basically it helps control the inflation when high supply tokens are increased in the market.
Scarcity
When supply gets lower than it means the demand and price of that product is going to increase immediately. Just like the value of gold is increasing because of the increase in its price. Which means that gold is getting scarier each passing day.
Reward holders
When you reduce supply of a certain token that means its demand is not getting low. It gives a spike to increase the value of the token which indirectly benefits all of the holders.
Confidence booster
Burning of the tokens tells us that the project will give long-term benefits. Quick profits are not involved in certain tokens which are burned.
Mechanisms that require deflation
There are some tokens which are designed in such a way that they burn automatically. Such as the percentage of every transaction gets burned when they are processed. Such as the meme coins.
Risks involved
Unlike other transactions, they are burning in walls, with lots of criticisms and risks.
● Price increase it’s not guaranteed. Which means when the tokens are burnt then it doesn’t mean they will get a high price after some time. If the demand of the tokens is weak, then it will not gain any spike in the prices.
● There are some projects which are burning their tokens just as the marketing stance without any real impact.
● If you are relying on the tokens, then it means that your economic design is really poor and it is not sustainable.
Conclusion
The burning of tokens is often taken as a completely strategic tool in the crypto market. Basically, it enhances the supply and demand of tokens. Although if your aim is price appreciation then this is not going to become a silver bullet for you.
But many times the Tokens have shown some really positive signals when you use them responsibly. It doesn’t matter if you are a holder or any investment, the smart way to understand the mechanism of burning of the tokens can take you a long way into the future.