Destruction of fiat money is a procedure carried out either to replace worn–out coins/ bills, or when issuing new ones and withdrawing old ones from circulation. In the world of cryptocurrencies, their destruction, for obvious reasons, has nothing to do with the above and, rather, resembles the mechanisms used in the stock market. If the number of shares issued by the company turned out to be excessive, it simply buys them back at current market prices, which should contribute to an increase in the value of assets.
This goal is to increase the demand for the token, that is, the deflationary impact, and is the main reason for the burning of cryptocurrencies. But far from the only one. Let’s look at all the main reasons in more detail.
Reduction of supply in order to increase the cost
The essence is clear in general terms: to make the token scarce, as a result of which its value will increase. In general, this is true only for fairly large, well-known and hyped assets (Ethereum, Solana, Binance). So, the Binance crypto exchange practices burning BNB in order to reduce working capital to a level of 50%.
As for young and not too popular projects, burning tokens is practiced less often for them. Usually they have to attract investors with a low cost, and when their number grows significantly, coins are destroyed, which leads to a jump in value (usually short-term).
Maintaining Cryptocurrency Stability
Any promising project does not go unnoticed, attracting a lot of investors, as well as increasing the army of miners. As a result, the issue of the asset increases sharply, and the stability of the cryptocurrency, on the contrary, decreases. In order to avoid a further increase in the number of tokens, a mechanism is used to contain the issue by burning coins. If this is not done, the supply will inevitably grow to such a scale that demand will be fully satisfied, which will cause the exchange rate to freeze and the capitalization of the cryptocurrency to decrease.
Through combustion, the emission level is controlled in such a way as to maintain a supply/demand balance at a level when demand prevails.
Destruction of tokens after ICO
There is a practice in the world of cryptocurrencies: new projects usually begin to develop with the initial placement of tokens through ICO. Such a step is designed to attract investors who become owners of an asset that can “shoot” in the future. But it is not always possible for the owners of a digital asset to correctly calculate the volume of the issue in order to meet the demand for their cryptocurrency. As a result, it turns out that a surplus has been produced that has not found a buyer. And in order to increase the profitability of primary investors and keep the cost at the initial level, this surplus is banally burned, providing a subsequent issue to miners.
Indicative burning
In the world of cryptocurrencies, where new players appear almost weekly, it is very important to attract attention to your product. Any public action, as a rule, contributes to these goals, including statements about the destruction of a certain amount of tokens.
The most illustrative example concerns the memcoin Shiba Inu, which is quite closely integrated into the Ethereum ecosystem. In May 2021, SHIB founders donated 505 trillion to Vitalik Buterin. cryptomonet as a marketing tool. The founder donated 50 trillion to charity, and burned 90% of memcoins, transferring them to a wallet address to which Buterin himself (and everyone else) does not have access, thereby removing them from circulation. As a result, the value of SHIB increased to $0.000035 in just an hour, immediately by 36% – this is a record one-time increase for this cryptocurrency.
It should be noted that memcoins received by Buterin accounted for about 40% of all coins issued at that time.
Combustion as a result of emission errors
Not all cryptocurrencies have their emission controlled. Stablecoins are especially guilty of this, where the generation of new coins is often the lot of a software network algorithm. Sometimes such tokens are issued in too large volumes, which in fact are not backed up by physical assets. This is exactly what happened at the time with the ESDT cryptocurrency, which operates on the TRON blockchain.
The surplus of issued coins turned out to be significant – 5 billion ESDT. In order to avoid problems with possible audits and maintain the stability of the coin, it was decided to burn the entire volume of issued tokens.
How Cryptocurrency is Burned
It should be noted that the destruction of tokens by private investors is not practiced, even if such a step contributes to plausible goals. This is usually done by the owners / developers of the coin, often by crypto exchanges, as well as decentralized projects. However, there are exceptions: for example, in the Ethereum network there is the possibility of self-burning ETH, for which you need to use the burn function and specify the number of funds to be destroyed, but the volume of such operations is extremely insignificant.
The most common way of burning cryptocurrency is to send coins to the wallet address, which is not suitable for ordinary purposes, that is, it works only for input. It is called the address of burning (in English transcription – eater / burn address). Usually, such an address is deleted after a successful transaction, that is, the corresponding amount of cryptocurrency is permanently withdrawn from circulation.
Note that in this way you can burn only those cryptocurrencies that use the Proof-of-Burn algorithm. Such blockchains usually have a burning function, which is often used by miners, which makes it easier for them to get new coins.
Another way to control the emission is the burning of the commission, and it is usually also embedded in the algorithm of the functioning of the blockchain. You can find out for yourself whether commission burning is provided for a specific token in the white paper. In the Ethereum network, such an opportunity appeared relatively recently, in 2021, as a result of the London hard fork.
It should be understood that in fact, the burning of a token announced by the developer is not always the withdrawal of a crypto asset from circulation. For example, coins are withdrawn to a wallet, which is not destroyed after a successful transaction. Such a move is a clear fraud, contributing to the achievement of the set goals, but ultimately negatively affects investors. The same actions are tracked – it is enough to check the burning wallet and make sure that it is not deleted.
Which cryptocurrencies regularly burn tokens
Most often this happens with tokens, the issue of which is not limited by any framework. But not necessarily.
The most famous example is the Binance crypto exchange, which has its own BNB token. The initial volume of the issue was 20 million coins, but the developers promised that they would burn cryptocurrencies quarterly until 50% of their original amount was destroyed. So far, these statements are being fulfilled, which contributed to the increase in the value of BNB.
On a regular basis, he practices commission burning and the Ripple token. At the same time, incineration is embedded in the transaction implementation algorithm. However, in absolute terms, the amount of funds being destroyed is very small – 0.00001 XRP, which does not allow us to judge its impact on the exchange rate of the coin. But in the medium term, the benefits of incineration will undoubtedly manifest themselves.
The developers of the Tron cryptocurrency also announced plans to burn a certain number of coins, but they delayed the implementation for a long time, and then they “shot” – they destroyed 1 billion coins at once.
You can also give an example of burning Bitcoin Cash, organized not by developers, but by token miners. The burning of commissions from closed transactions is practiced by the Antpool mining pool, one of the undisputed leaders in its segment. The pool burns 12% of the commission amount for the found blocks from April 2021, contributing to the growth of interest in the coin from investors and thereby popularizing the BCH hard fork.
In any case, private owners of cryptocurrencies should not be afraid of burning tokens – it does not threaten their personal funds. Tokens belonging to developers, the exchange or, as in the latter case, miners are usually burned.