What is token burning?
Token burning refers to the permanent removal of existing cryptocurrency coins from circulation.
The practice of burning is common in the industry and is quite straightforward. Token burning is an intentional action taken by the coin’s creators to “burn” or remove from circulation. There are several reasons to burn tokens this way, but generally the move is for deflationary purposes. Burning is often used by altcoins and smaller tokens to control the number in circulation, providing greater incentives to investors.
The burning mechanism is unique to cryptocurrency, as regular fiat currencies are not usually “burned,” though the flow of available currency is otherwise regulated. Token burning within Belifex will be used when we have done series of buybacks. These bought back tokens will then be burned to increase the value of each token. Even so, token burning has several unique uses and serves different purposes.
How does token burning work?
Although the concept is straightforward, token burning can be accomplished in different ways. The goal is to reduce the existing number of tokens available.
Although it sounds extreme, burning tokens doesn’t disintegrate them literally, but it does render them unusable in the future. The process involves the project’s developers repurchasing or taking available currency out of circulation by removing them from availability. To do so, the tokens’ signatures are put into an irretrievable public wallet known as an “eater address” that is viewable by all nodes but perma-frozen. The status of these coins is published on the blockchain.
Why do companies burn tokens?
Regardless of how it’s accomplished, token burning is usually a deflationary mechanism. Most projects use it to maintain a stable value and keep incentives for traders to hold their coins.
There are multiple reasons why a project would choose to burn tokens, and all of them have value for token holders. The most common reason is to boost the value of each token by reducing existing supply. In theory, fewer coins available for sale and on exchanges means that each individual token will be more valuable.
Indeed, this is why most cryptocurrencies have a finite amount either in circulation or in future supply (such as Bitcoin’s eventual limit).
By holding their hand on the figurative faucet, projects can increase the value of each token holder’s existing supply and create incentives for ongoing support.
The coins can be bought back at fair rates and then instantly burned to increase the value of each holder’s existing token amount. If tokens are required to be repurchased at market price, investors could even stand to profit based on the price at which they purchased originally.
Can token burning be used for anything else?
In short: Yes, it can.
Do token holders really benefit from token burning?
While projects themselves gain significant advantages from burning their tokens, the process isn’t a zero-sum game.
Token holders also benefit in several ways from the process.
It may seem like token burns are designed to give projects an edge, but the reality is that the mechanism is beneficial to both developers and investors.
In many cases, burning tokens can help stabilize a coin’s value and curb potential price inflation.
The stability gives investors a greater incentive to hold the coins and keeps prices at more favorable rates. Token burns also project a sense of confidence and reliability, especially at early stages of a coin’s development.
