What Is Token Burning in Crypto and Why it Matters?

At the brink of facing one of the worst years of our generation in early 2020, markets met an extreme drought of one of the most essential everyday products today: toilet paper. 

If you ask me, that’s when we knew we were in for a rough time. When you go to the store to get more toilet paper and there are like 3 people fighting over the last remaining toilet paper package, something is clearly off.

Toilet paper was selling for a fortune online at the time. People were in the news talking about how much they love their favorite T.P. brand, while we were all wondering if a bidet was actually hygienic. For a point in time, toilet paper became incredibly in demand. 

In fact, demand surpassed supply as people stockpiled a year’s use of toilet paper in a single supermarket trip. And when that happened, each paper roll became significantly more valuable. 

What if today, a toilet paper brand CEO wanted to mimic the same effect to boost the value of his product? What if said brand ‘burned’ thousands of toilet paper rolls in a single day, leading people to once again fight over the basic need of soft and cozy paper used for… basic necessities. 

Well, that CEO would likely be arrested. 

But, actually, that has happened before. During the great depression, it was not unlikely for farm owners to burn large amounts of crops or dump milk to artificially reduce supply and drive up prices. Same principle: destroy your product to make the remaining product more valuable.

In the real world, using products that are essential for our lives that practice seems horrible. However, in digital markets, that practice has become standard practice, and investors love it when projects 'burn' their tokens. But what is token burning in crypto? We need to first understand how it works. 

What Is Token Burning

Simply speaking, token burning means removing coins from circulation. This happens because crypto projects may want to reduce supply to increase scarcity, or even boost demand for a given asset. 

Doing so doesn’t necessarily mean that the market capitalization of a project will increase, but it does affect its value per token. Fewer tokens in circulation means that each holder now owns a larger slice of the collective amount. 

Token burns happen when coins are sent to a wallet address that no one can access, typically referred to as “null” addresses, or “burn wallets”. These tokens will still exist, but the fact that they can never be accessed by anyone means that they have completely left monetary circulation. 

Are token burns transparent and verifiable?

Much like everything else in blockchain technology, token burning processes are completely verifiable and transparent. Every burn wallet is publicly accessible, allowing us to see how much is being burned and how much has been burned over time. 

For instance, Shiba Inu has three main burn wallets, each containing massive amounts of SHIB tokens. For instance, this wallet (0xdead000000000000000042069420694206942069) contains over 410 quadrillion tokens that are forever gone from the crypto market. 

How Token Burning Works

There are two main ways token burning can be achieved. Manual burns, for instance, typically happen when a project decides to destroy tokens, typically tied to milestones or quarterly events. 

Automatic burns are a burning mechanism that is built into the project’s smart contracts and happen either periodically or when a specific trigger is achieved. This cuts out the human factor and allows for a steady deflationary system in a cryptocurrency’s tokenomics. 

Does token burning make a coin deflationary?

While token burning aims to generate deflation, the simple act of removing coins from circulation does not guarantee deflation. To really become deflationary, a project would need to burn more tokens than it mints. 

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Crypto Token Burn Explained

Let’s say a project has a supply of 1 trillion tokens. This amount, while extremely high, is not at all far-fetched in the crypto market. Some projects have trillionaire, sometimes even quadrillionaire supplies because it allows them to have extremely liquid markets, which can be good for gamification, micro-transactions, and community engagement.

However, massive supplies tend to work against these projects if gone unchecked. This is why token burning is a major component of a token’s economic health. Even lower supply tokens tend to add token burning features to keep them from going inflationary.

Token Burn Effect on Price

Token burning can have massive impacts on a cryptocurrency’s price. If an asset suddenly halves its supply, the market reaction could be swift. As the textbook economic principle says, lower supply paired with higher demand = greater value. 

There is a catch to token burning, though. It’s not like anyone can go around creating new cryptocurrencies, burning 99% of their supply, and suddenly become billionaires. At the end of the day, demand will always trump supply management. 

Can token burning fail to raise the price?

Token burning more often than not fails to raise the price of cryptocurrencies if the demand is not there. Think of it like this: if a wizard is selling 50 magic potions that always make you itchy, getting rid of half of that supply will not help ol’ Steve the Sorcerer close a sale. Because there’s simply no value in the product.

Purpose of Token Burning

Token burning is a tool that cryptocurrency projects have for controlling supply, supporting price, and allowing for community participation. It follows a basic supply and demand principle, where, much like toilet paper in 2020, a supply shortage tends to drive up value.

This tool also allows for projects to course-correct their tokenomics in real time. If developers realize they have minted too many tokens and it's causing it to become too inflationary, token burning will always be there to fix the issue.

Burning can also be considered a utility tool. Some projects build burning mechanisms as one of the main aspects of tokens, hoping to attract investors into a potentially deflationary asset. Regular burns can also help projects show their commitments to holders, as removing coins from circulation is generally considered a way of saying "we're actively working to make your tokens more valuable."

How Coins Are Burned in Cryptocurrency

At a technical level, token burning is the act of sending tokens to “burn addresses”, which are crypto wallets that no one in the world has access to. The most common burn address is 0x000000000000000000000000000000000000dEaD, which spells out "dead" in the final characters.

Anyone can do it, really. To burn a token, all you have to do is send your crypto to a burn wallet and watch those tokens disappear for all eternity. 

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Token Burning Examples

Token burning has become the standard deflationary consensus among most altcoins. While they may differ in how these burns are made, one way or another, cryptocurrency projects have a way of managing what otherwise would be an unmanageable supply. 

Some projects are responsible for sending millions, and even billions of dollars down the drain with token burns. While this may sound jarring, it is actually beneficial for token holders because it reduces the circulating supply and can increase the value of remaining tokens.

What are examples of famous token burns?

The most jarring example of token burn is undoubtedly the Vitalik Buterin/Shiba Inu case. After getting sent the tokens by Shiba Inu’s team in a marketing stunt, Ethereum’s co-founder decided to get rid of all of it in one go, burning 410 trillion SHIB tokens, at the time valued at $6.7 million. 

Some of the most notable examples also include Binance (BNB), which conducts quarterly burns that are based on its cryptocurrency exchange profits. Their last burn saw the destruction of 1,595,599.78 BNB, valued at approximately $1.024 billion USD at the time of execution.

Ethereum takes a different approach to deflation via EIP-1559, launched in 2021. This method automatically burns a portion of every transaction happening on the blockchain, and has already burned over 4 million ETH. 

Token Burning and Supply Reduction

Token burning is tasked with altering the dynamics in a cryptocurrency’s tokenomics, bringing its supply curve leftward. 

When Central Banks want to battle inflation, they increase interest rates, driving people to spend less because high-value purchases like houses and cars become more expensive due to higher loans. 

Instead, crypto has a way to battle inflation by attacking the very supply of money in the first place. This is a much more volatile and faster method, immediately decreasing the amount of coins available. 

Does Burning Tokens Increase Value

If token burning is so effective, why not bet the house on a leveraged BNB position every quarter? Well, doing so would be extremely unwise because just the fact that tokens are being burned does not mean the price will go up. 

While BNB burns often coincide with price increases, at least momentarily, there are also times when they don’t. The thing is, market conditions are still important here, and if investors’ appetite is not all there, a.k.a. “demand”, a token burn will hardly do the trick.

Adding to that, token burns are also able to create a lot more speculation and volatility. This means that announced burns can become a great way for institutions to collect your stop-loss before eventually moving forward. 

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Token Burn Mechanism in Crypto

Token burning can get quite sophisticated in how it can be implemented and governed. Some projects implement a dual approach, allowing for manual burns while also conducting automated token burns.

Some implement a “buyback and burn” strategy, which means using revenue to automatically buy tokens and burn them. This creates a double deflationary effect on supply as these tokens are simultaneously being bought and removed from circulation. 

Other projects incentivize token burns in exchange for another token. This rewards the user with a financial reward of a different asset that could appreciate in value over time, creating a dual benefit of reducing supply while offering holders a chance to profit from the swap.

What is Proof-of-Burn

While similar, proof-of-burn is a different use case for token burning. In this consensus mechanism, users who burn their tokens gain special privileges such as the right to mine more tokens or even network privileges. 

Frequently Asked QuestionsAQs

1. How is token burning different from staking?

Burning destroys tokens forever, staking temporarily locks them for rewards.

2. How often do cryptocurrencies burn tokens?

Varies by project. Some quarterly, others with every transaction, some irregularly.

3. Is token burning permanent?

Yes, completely permanent and irreversible.

4. Which cryptocurrencies burn tokens regularly?

BNB, ETH, SHIB, and many others have regular burn programs.

5. Can token burning be reversed?

No, burned tokens are gone forever.