What is token burning and why is it necessary?

Token burning refers to the destruction of a certain amount of cryptocurrency with the aim of balancing its supply and demand. Usually, this procedure increases the value of the asset.

In essence, token burning is similar to the process of share buybacks in the stock market. If a company has issued shares and wants to reduce their quantity, it needs to buy back those assets at market price. Of course, asset buybacks and token burning have their differences, but they share a common goal of making the asset deflationary.

Why do coin developers burn tokens?

There are several reasons for token burning:

1. Supply reduction. Some developers burn tokens to make the cryptocurrency more scarce.
2. Increase in cryptocurrency value. Supply reduction triggers an increase in the asset's price, as was the case with major projects like Binance Coin, Ethereum, and Solana. Even lesser-known and new cryptocurrencies may burn tokens to artificially increase their value. Initially, young projects attract investors with a low price, and then developers burn tokens to sharply raise their value.
3. To avoid a decline in the cryptocurrency's value. Token burning is carried out to prevent inflation, as unlimited issuance would lead to an increase in the number of coins, gradually devaluing each token.

Token burning started gaining popularity among coin developers in 2017. Some of the pioneers in this practice were the creators of Binance Coin (BNB), Bitcoin Cash (BCH), and Stellar (XLM). Developers decided to take this step to reduce the supply, which was followed by a surge in coin prices.

During initial coin offerings (ICOs), some projects burn the unsold volume of the cryptocurrency. This way, developers maintain the coin's price among investors.

How does the coin burning process work?

Token burning can be carried out by the project developers themselves, cryptocurrency exchanges, decentralized platforms, as well as asset holders.

To describe the process in more detail, developers send a certain amount of tokens to a wallet that is inaccessible. The wallet has a “burn address” or an “eater address”. The token disappears permanently from circulation when it is sent to this wallet.

Which projects burn tokens?

Ethereum

In the summer of 2021, the London hard fork was launched to partially burn Ethereum that was in circulation. As of August 2022, the number of destroyed coins reached 2.5 million, and the figure continues to grow.

A hard fork is a significant change in the blockchain's code. Developers make not minor adjustments but completely change algorithms, emission rules, distribution methods, and other parameters.

Binance Coin

The developers of Binance Coin announced their intention to reduce its issuance to 100 million BNB. Since December 1, 2021, BNB has been burned quarterly.

In addition to these major projects, coins such as TRX and Ripple are also burned. For increased investor attention, creators of Shiba Inu, Baby Doge, Elastos, and Optimism also engage in token burning.

Token burning can partially strengthen a project's reputation and raise the coin's value. However, burning tokens does not guarantee an increase or stabilization of the coin. The use of token burning indicates that developers have faith in their project and hope for the asset's growth in the future. For convenient tracking and finding favorable cryptocurrency exchange rates, you can visit our website, BestChange.com.