The permanent withdrawal of existing cryptocurrency coins from circulation is referred to as token burning. Burning is a popular and straightforward procedure in the industry. Token burning is the deliberate action taken by the developers to delete a certain number of tokens from circulation.
Tokens are burned for a variety of purposes. This is typically done to induce deflation. This process is unnecessary for larger blockchains like Bitcoin and Ethereum. Altcoins and smaller exchanges, on the other hand, often use burning to regulate the number of tokens in circulation. Potential investors would gain further as a result of this.
Standard fiduciary currencies are not typically "burned," so the burning process is unique to cryptocurrencies. Traditional currency, on the other hand, is governed in a different way. Token burning is somewhat close to public corporations buying back shares, which decreases the amount of available shares in circulation. Burning tokens has a variety of applications and serves a variety of purposes. What is the goal?
Token Burning Process
The burning principle is basic, but it can be accomplished in a variety of ways. The aim is to reduce the number of tokens that are currently available. This might sound specific, but burning tokens does not actually kill them; rather, it renders them unusable in the future.
The method entails the project developers redeeming or withdrawing the available currency and then removing it from circulation. To accomplish this, token signatures are stored in a special public wallet called the "eater address," which is open to all nodes but is permanently blocked. On the blockchain, the status of the tokens found within it is written.
Burning tokens can be done in a variety of ways, depending on the goal of the operation. After the ICO (initial coin offering), some will perform a one-time burn to delete unsold tokens from circulation. Others tend to burn coins at fixed or variable intervals on a regular basis.
Binance, for example, burns tokens every quarter as part of its goal of burning 100 million BNB tokens. The number of tokens issued per quarter is determined by the number of transactions completed on the platform.
Tether, on the other hand, produces tokens when money is deposited into savings and burns the same amount when money is collected or withdrawn. Whatever mechanism is used, the end result is the same: burned tokens become worthless and are essentially removed from circulation.
Tokens are burned for a variety of purposes.
What really justifies the burning of cryptocurrencies? There are a variety of compelling factors to consider:
A framework for achieving consensus that works
This is true for coins that use the Proof-of-Burn consensus system. The POB is a one-of-a-kind method for achieving distributed network consensus. To obtain it, users must burn a portion of their coins.
Tokens' value is being increased.
The central economic principle that determines the value of a particular commodity, in this case cryptocurrency, is demand. Cryptocurrencies, unlike fiduciary currencies, are deflationary. This ensures that the supply of most cryptocurrencies remains stable, with no new coins being created until the total supply has been reached. Bitcoin is the best example, since it has a fixed supply of 21 million coins. Since there are a finite number of bitcoins in existence, as demand rises, prices will rise as well. Similarly, if the supply of bitcoins begins to decline due to, for example, fire, missing private keys, or misplaced bitcoins, prices would increase. Since tokens are intentionally lost, they reduce the total supply in circulation. This is an efficient way to boost and maintain the price of tokens. The economic rules clearly state that decreasing the quantity of a good on the market increases its value!
Anti-spam security
Coin burning acts as a normal anti-DDOS (Distributed Denial of Service) defense mechanism, preventing spam from blocking the network. Similarly, users pay a small fee to submit bitcoins (BTC) or give away Ethernet in return for smart contract calculations in the Ethereum blockchain. Burning cryptocurrencies results in a transaction execution expense. Rather than paying users to validate transactions, some projects have included a system that automatically burns a portion of the sent number. Ripple (XRP) is an example of a project that uses this economic model.
So when Binance burned bnb. Price gets high. What I think about this strategy is genius but at the same time very centralized.