What Happens When Crypto Tokens Are Burned?

What Happens When Crypto Tokens Are Burned

Removing crypto tokens from the blockchain can add to their value. Find out how!

As of November 2021, the cryptocurrency market is worth more than US$3 trillion, and the non-fungible token (NFT) market is worth more than US$7 billion. As cryptocurrency and NFTs continue to gain prominence, it has become crucial to understand various aspects of the two to make the most out of their surging prices and popularity. 

One aspect we need to understand is “burning tokens”. Burning tokens, both in the case of NFTs and cryptocurrencies, means removing them from the blockchain and making them unusable. But why would anyone do this? And how does it work? Let’s look at the process of token burning and its purposes.  

Why are tokens burned?

Cryptocurrency tokens are burned to incentivize those who have invested in crypto. Burning tokens changes the supply of crypto available, thus creating a deflationary effect (wherein the supply of an asset is reduced, thereby increasing scarcity and, in turn, overall value). With a fall in supply, the number of tokens available becomes more valuable. The same principle is used to justify burning NFTs as well. 

Another important use of token burning is to maintain the value of stablecoins (digital currencies whose value is pegged to real-life assets, like gold or fiat currencies). By burning and minting stablecoins depending on market needs, the stable value of the stablecoin can be maintained. 

How to burn NFTs and crypto tokens?

Crypto tokens

To burn crypto tokens, they are transferred to a private address called an address eater. An address eater cannot be accessed by or assigned to anyone, thereby getting entirely removed from circulation. The burning of crypto tokens is recorded on the blockchain so that investors can see it and confirm that tokens have indeed been removed from the blockchain. 

There are several other ways in which crypto tokens are burned. In some cases, right after an initial coin offering is conducted, the developers behind the crypto execute a one-time burn project to eliminate assets that have not been sold. 

Another way in which crypto tokens are burned is the BURN token protocol that burns tokens with every transaction. Here, whenever a crypto holder conducts a transaction using the token instead of paying a transaction fee to a miner, the fee’s value is burned out of circulation. 

NFTs

To burn NFTs, you need to log into the marketplace they were minted on. Once logged in, you need to select the token you wish to burn and choose the setting “burn token”. Some platforms might require you to choose your smart contract, click “write contract” and then access the burn function. Once you find the burn function, enter your token ID and click “write”. 

To complete the burning process, you will need to pay a transaction fee called “gas fee”.  This is because the act of burning an NFT is considered a transaction. The fee varies depending upon current supply and demand conditions on the blockchain. 

Proof of burn (POB)

One of the mechanisms used to burn NFTs and crypto tokens is proof of burn. Investopedia defines it as “one of the several consensus mechanism algorithms implemented by a blockchain network to ensure that all participating nodes come to an agreement about the true and valid state of the blockchain network.”

POB is used by crypto miners to show that they are involved in the network so that they can be granted access to mine crypto tokens. The more coins a miner burns, the bigger the virtual mining rig will be provided to them in exchange (that is, they are provided with more power to mine).

To sum up, crypto tokens and NFTs are burned to reduce their supply and, in turn, increase their value. So, is burning crypto good for investors? The answer is yes. 

Tokens are usually burned by the development teams behind the crypto asset mainly for deflationary purposes. In the recent case of Shiba Inu, token burning did exactly that. Nearly 41% of the entire supply (which was worth US$6.7 billion) of Shiba Inu was burned by Ethereum co-founder Vitalik Buterin in May this year. This led to excitement about a price rally (or a rise in value) among the token’s investors on social media. Post burning, the token reached a market capitalization of US$20.37 billion, clearly showing that token burning is an effective strategy to cause a rise in the token’s value. 

Header image courtesy of Freepik

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