DeFiChain

<p>Over the past decade, alongside the rise of cryptocurrency, the field of Tokenomics has equally expanded. What was once a very small field now has an expansive system of literature dedicated to it, with experts from around the world designing various economic systems for cryptocurrencies to exist in.</p><p>As cryptocurrencies are a digital medium, their value is created by imposing a limit on the total number of available coins. If this number were infinite, the cryptocurrency couldn’t possibly have value. In order to create and sustain a sense of economic value in a cryptocurrency, most projects opt for a limited number of tokens.</p><p>From there, new cryptocurrencies are minted and burned in order to retain economic stability. Although we see these terms all of the time in the world of blockchain, very few actually understand what they mean.</p><p>In this article, we’ll dive into burning tokens, demonstrating what this actually means and how it works.</p><h2 id="header-0">What Does it Mean to Burn a Token?</h2><p>Burning a cryptocurrency relates to its destruction. Since a digital asset cannot physically be burned or destroyed, they are removed from the accessible pool of tokens. To do this, projects send fixed amounts of cryptocurrency to a digital wallet that has no retrievable private keys. This wallet will only be able to receive tokens and will be inaccessible to users.</p><p>As no one can access or use this wallet, each token that is sent there is effectively taken out of circulation - destroying or “burning” it. Most of the time, this is done by the governing body of the project itself.</p><p>However, some projects like Shiba Inu offer rewards to users that burn their cryptocurrency through a designated portal. Equally, a handful of projects run what is known as community burning, where they implore all users to burn a small amount of their currency, helping to increase the relative price of all remaining assets.</p><h2 id="header-1">Why Do the Projects Opt to Burn Cryptocurrency Tokens?</h2><p>Many cryptocurrency projects engage with burning mechanics. Even those that do not actively advertise this still do to some extent. For example, <a href="https://learn.bybit.com/altcoins/what-is-ethereum-and-how-does-it-work/" rel="noopener noreferrer nofollow">Ethereum burns a small amount of ETH</a> for every single transaction, helping to stabilize its economy for the long run without actively advertising community or system-based burnings.</p><p>There are a range of reasons that blockchain projects burn their cryptocurrency tokens:</p><ul><li>As a Consensus Mechanism</li><li>To Boost the Value of Assets</li><li>To Hide Whales</li></ul><p>Let’s break these down further.</p><h3 id="as-a-consensus-mechanism">As a Consensus Mechanism</h3><p>Of the various blockchain consensus mechanisms, one that is increasingly being used is <a href="https://www.investopedia.com/terms/p/proof-burn-cryptocurrency.asp" rel="noopener noreferrer nofollow">Proof-of-Burn</a>. It attempts to solve the high energy consumption of the Proof of Work mechanism. Miners are able to burn tokens as they are mined, reducing the total energy that is needed to validate transactions.</p><p>From there, miners are able to continue mining without an increase in mining power needed. Proof of Burn is growing in favor due to the recent dialogue around the climate impact of currencies like Bitcoin.</p><h3 id="to-boost-the-value-of-assets">To Boost the Value of Assets</h3><p>By far the most common reason for burning cryptocurrency tokens is to impact the value of the coin itself. As cryptocurrencies have a fixed limit of total assets, a reduction in the active circulation boosts the price of all of the coins that remain.</p><p>If we had ten tokens that were all worth $10 and then burned two, the total value would still be $100. Yet, this total is now split across eight assets instead of 10, increasing each coin’s relative value. Most of the time, the decision to enact a burn is decided by the developers of the cryptocurrency.</p><p>Typically, this will happen when developers or the community want to increase the price of the token. They reduce the supply, creating the desired effect.</p><h3 id="to-hide-whales">To Hide Whales</h3><p>One fairly dubious use of cryptocurrency burning that has become apparent over the past few years is to hide investment values that initial developers or whales hold. When developing a new cryptocurrency, the developers can set the total amount of currency in circulation. Using this figure, combined with burning, they can manipulate the percentage share they appear to hold.</p><p>For example, let’s take a theoretical cryptocurrency that has a flat 1 billion tokens. If the developers give themselves 150 million tokens, they hold 15% of the total share. If the developers then burn 500 million tokens, they can still say that they have 15% of the original supply. However, in reality, the developer will hold 150 million out of the remaining 500 million tokens, which is 30% - or double what they claimed.</p><p>Using burning, developers can manipulate the figures, making it look like they own much less of the total share than they actually do. This is commonly done by early investor crypto whales and nefarious developers.</p><h2 id="header-2">Burning Token: Use Cases</h2><p>Token burning is extremely common, with many of the <a href="https://coinmarketcap.com/" rel="noopener noreferrer nofollow">world’s largest cryptocurrencies</a> engaged in it to some extent.</p><p>Here are just a few examples of burning tokens in action:</p><ul><li><a href="https://www.binance.com/en/price/bnb" rel="noopener noreferrer nofollow">Binance Coin</a> - <a href="https://academy.binance.com/en/articles/what-is-bnb-auto-burn" rel="noopener noreferrer nofollow">BNB has an auto-burn feature</a> that aims to reduce the total number of coins within the circulation pool.</li><li><a href="https://ethereum.org/en/" rel="noopener noreferrer nofollow">Ethereum</a> Transaction Burn - <a href="https://cryptobriefing.com/eip-1559-has-burned-two-million-ethereum/" rel="noopener noreferrer nofollow">EIP-1559</a> was a protocol update launched by Ethereum which burned a little bit of ETH for every transaction. It has burned over 2 million ETH tokens on the side.</li><li><a href="https://defichain.com/" rel="noopener noreferrer nofollow">DeFiChain</a> on CakeDeFi - <a href="https://twitter.com/defichain/status/1385988349501054976?lang=en" rel="noopener noreferrer nofollow">DeFiChain burned 156 million $DFI</a> in April of 2021.</li></ul><p>As you can see, a vast range of blockchain projects will routinely burn cryptocurrency in order to stabilize their economy.</p><h2 id="header-3">Final Thoughts</h2><p>There you have it! Token burning is a useful part of core tokenomics which many of the world’s leading cryptocurrencies will employ. From controlling the baseline value of the currency to helping with managing the wider economy, there are many reasons why a company would decide to burn their currency.</p><p>Everyone from Binance Coin and Ethereum has engaged with this. You’d be hard-pressed to find a reputable ecosystem that hasn’t factored burning into their tokenomics to some extent.</p>

Token Burn: What Happens When a Token is “Burned”?

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