Maintaining an asset’s worth can be a challenging challenge to conquer, especially in a deflationary market. Since many individuals are concerned about the enormous volume of coins in circulation and the capacity to generate coins quickly when it comes to cryptocurrencies, numerous cryptocurrencies have developed cutting-edge strategies for motivating investors and preserving the value of their currency. This strategy is known as Token burning.
What Is Token Burning?
Token burning depletes the overall cryptocurrency supply. Platincoin elucidates that token burning entails transferring money to a wallet whose private keys are unknown, and these transferred assets are inaccessible since only this wallet can accept them.
Burning cryptocurrency is a popular method of boosting the value of a coin or token. Token burning removes coins from circulation, permanently decreasing the overall supply of the cryptocurrency, thus increasing scarcity and raising the value of each remaining coin.
How Do They Burn the Tokens?
Cryptocurrencies have a burn mechanism to eliminate assets. Any cryptocurrency owner can use the burn function of Binance Coin by simply specifying the number of coins they want to delete in their wallet. The smart contract then deducts the coins after first confirming that the holder has them in their wallet and also updates the total amount of coins in circulation.
In some situations, token burning occurs gradually over time without the users knowing. For instance, each transaction on Ethereum consumes a little amount of ether that accumulates over time and gradually reduces the available supply, thus increasing the coins ‘value.
The only thing a user technically needs to do to burn bitcoin is to send them to a wallet with an incorrect address. Other times, burning tokens happens automatically. For instance, some networks use a little amount of cryptocurrency as a transaction fee or to burn during mining.
Why Do They Burn the Tokens?
Platincoin highlights that different cryptocurrencies desire to burn money for a variety of reasons. While some projects choose to incorporate this procedure in some capacity, later on, others choose to do so right away as part of the protocol itself. Here are some reasons;
To carry out the Consensus Mechanism for the project
Proof-of-burn (PoB) is one of the network consensus mechanisms that demands constant coin burning on the part of both miners and users. Because this method doesn’t consume any resources from the real world, Platincoin believes it to be an effective way to verify transactions.
To Protect Against Spam
A network can be protected from Distributed Denial-of-Service (DDoS) attacks by burning coins, which also prevents the network from being slowed down by spam transactions.
To Increase a Coin’s Value
Some cryptocurrencies are deflationary in nature and have definite supply restrictions, in contrast to fiat currencies, which are characterized by unrestricted central bank printing. Hence, burning increases the coin’s value.
To Keep Stablecoins Stable
Token burning may be required in some cases to maintain the stablecoin’s value tied to its underlying fiat money (like the dollar.
To promote the coin
Platincoin points out that publicity is another reason for token burning. Sometimes an investor will purposefully burn a significant part of the tokens that are in circulation and announce it on social media. As a result, demand for the cryptocurrency may grow even more, driving up the price per token.
