In the cryptocurrency world, there is such a thing as token burning which means burning tokens.
But what is token burning, where are tokens burned and what's the point of destroying existing tokens?
Token burning or token burners are quite common in the crypto world.
Token burning refers to the permanent deletion of an existing cryptocurrency coin from circulation.
This token burning mechanism also makes the cryptocurrency world unique, as the realm of fiat currencies does not recognize this term.
This token burning is almost similar to the buyback of shares by an exchange-listed company, with the aim of reducing the number of shares available.
Token burning is the deliberate action taken by a coin maker to "burn" - or remove a number of tokens from the total tokens available on the market.
There are several reasons for burning tokens, including deflation.
Although larger blockchains such as Bitcoin and Ethereum do not typically use this mechanism, burning is often used by smaller altcoins and tokens to control the amount in circulation to provide greater incentives to investors.
Although the concept is simple, token burning can be done in various ways. Its purpose is to reduce the number of tokens available.
As extreme as it may sound, burning the tokens doesn't actually destroy them, but makes them unusable in the future.
This process involves the project developer buying back or removing an available currency from circulation by removing it from availability.
To do so, the signature token is deposited in a public wallet which cannot be retrieved.
This is known as the "address eater" which is visible to all nodes but is permanently frozen. The status of this coin is published on the blockchain.
There are different ways a project burns tokens, and these vary depending on the purpose.
Some will use a one-time burn after the ICO (initial coin offering) is complete to remove unsold tokens from circulation as an incentive for participants.
Others prefer to burn coins periodically at fixed or variable intervals and volumes.
For example, Binance burns tokens every three months, burning these tokens is part of a commitment to reach 100 million BNB tokens that are burned.
Coin volume changes based on the number of trades made each quarter.
Others, such as Ripple, will burn tokens incrementally with each transaction.
Whenever a party transacts via XRP, one party can set a fee as it wishes to prioritize execution, but the fee is not returned to any central authority.
Instead, they are burned by sending them to the eater's address as soon as the transaction is complete.
Stablecoins, such as Tether (USDT), will create tokens when they deposit funds into their reserves and burn an equivalent amount when the funds are withdrawn.
Regardless of the mechanism, the result remains the same: Burnt tokens cannot be effectively used and removed from circulation.
Can Burning Tokens Be Used for Anything Else
In short: Yes, you can. One of the uses of some of the projects discovered for token burning is to create a more reliable consensus mechanism for verifying and adding transactions to the blockchain.
One popular mechanism that evolved from token burning is Consensus Burning Proof of burn (PoB), which is based on users destroying their tokens to gain mining rights.
PoB tries to solve this problem by limiting the number of block miners that can verify (and attach new blocks to the blockchain) to match the number of tokens they have burned.
Basically, they are creating virtual mining fields that can grow bigger as they burn more tokens.
In theory, the tokens being burned will reduce the number of miners at any given time and reduce resource requirements as competition is lowered.
In many cases, burning tokens can help stabilize the coin value and curb potential price inflation.
Stability gives investors a greater incentive to hold coins and keeps prices at more profitable levels. That way, network uptime and bandwidth remain healthy.
The burning of tokens also shows trust and reliability, especially in the early stages of coin development.
Another main reason why projects burn unsold tokens after the ICO is to provide investors with greater transparency.
