ZoneBitcoin EditorialBurning a token is a very common action in the crypto world. To summarize from the start of this article, know that the destruction of tokens would (in theory) increase its price.
Burning is therefore a method of reducing the supply of tokens. Many protocols that have inflationary tokens in particular use this method.
Some tokens are even known for this, for having burned millions of tokens, as is the case with Shiba Inu for example….
We remember, for example, that the developers had sent more than half of the tokens to Vitalik Buterine (the founder of Ethereum). A publicity stunt certainly. In short, Vitalik decided to burn 90% of these tokens and gave the rest to a foundation.
Wow…😍 I love Vitalik…
Token destruction…What exactly does it involve?
In fact, when we say "burn", we are talking about the concrete action of INTENTIONALLY sending tokens to an unusable wallet address. This immediately removes them from circulation. The address in English is called: "burn address" or "eater address" (like an eating address in some way for the idea of swallowing the tokens forever).
Remember that these tokens are then lost forever. Irrecoverable.
In fact, we can all do it because technically, it's very simple but it wouldn't really have an impact. This is why it is mostly the project developers who do it.
On the one hand, for this to have a strong consequence, you must be able to burn a significant quantity of tokens. This then allows – according to the most basic economic rules – to reduce the supply and therefore increase the value of a crypto.
This does not mean, and it is very important, that we point out here: Burning tokens will not cause the price to increase.
And this is the great irony of history and where many newcomers get lost in hopes and promises...
Destroying tokens will not cause its price to explode…
Well, it would be so nice if that were the case. It is a fact. Lots of projects use the burn technique and the effects aren't crazy either. Yeah…
We must now tell you about certain disadvantages of this practice. Because yes, there are not only advantages.
Already, a burn can mislead investors and be mythos. You read that right, yes, the word "mythomaniac".
Basically, developers can lie and claim they burned tokens when they – in fact – sent tokens to a wallet they control. This is why it is always necessary for the community to check the wallet in question.
Second way to deceive the community; This is when the developers do it to hide the real whales.
do you want an example?
Imagine a developer who launches a crypto with 1 billion tokens. He takes 100 million tokens for himself. There, he therefore has 10% of the offer which is common for developers. And he makes an announcement and burns 600 million tokens. Now that there has been a burn, he actually owns 25% of the total cryptos. Except that there, he communicates more about it (of course)...
By the way, you should know that there is something called "proof of burn" even if it does not mean what you immediately think of.
What is proof of burn?
It's actually a consensus algorithm that blockchains use to validate and add transactions. This helps prevent fraud and ensures that only valid transactions are added and visible.
When there is a proof of burn that is used, then miners must burn their own tokens to be able to create new transaction blocks. The more they burn, the more they will be able to mine.
Some developers prefer this consensus algorithm which they consider less energetic than that of proof of work or proof of stake, for example.
Since when has burn existed?
You should know that in fact burn is a sort of equivalent to what in classic finance is called buyback (i.e. share repurchase).
The idea is similar even if the action is different. A share buyback is when the company repurchases its own shares at market price to ultimately reduce the total number of shares available.
They are actually different actions that seek similar effects, we would say.
The first time we heard about the crypto burn was in 2017 and in 2018 a little more. It started with Binance Coin, Bitcoin cash and then Stellar (XLM). These cryptos burned tokens to reduce supply and increase prices…
Now, especially since the explosion of DeFi and Yield Farming, cThis is a very (too?) common process with newly launched cryptos. This occurs more with inflationary tokens.
This has become very popular because it allows cryptos to start with affordable prices and then artificially increase values once people own them. Typically, a project launches with 1 billion tokens that are only worth fractions of cents. Investors flock to it and after a certain time, the developers announce a burnout. This is supposed to increase the price and in fact, it turns out to be true... For a while... Because afterwards, you have to start again... etc...
- For example Binance Coin has been undergoing burns on a quarterly basis since 2017. The platform has decided to do so until 50% of the total supply is removed from circulation.
- Stellar burned more than half of its supply in 2019. This did not have such exponential repercussions for XLM…
Final word: The right plan every time?
We don't really have the perspective to have a pure and absolute theory on the correlation between burn = increase in value. There are of course other parameters to take into account such as demand...Yes, read the article on supply and demand which determines the price of a crypto…
Nothing is simple in crypto, keep this maxim in mind.
That said, this necessarily slows down the supply in circulation (see also the article on the different "offer" of cryptos).
Finally, therefore, the burn process can slow down the inflation of a token but without guaranteeing an increase in its price.
Likewise, just because a crypto uses the burn process does not make it a great investment. There are good and bad cryptos that use this principle.
Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
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