What is the role of token burns in the ecosystem ?
Token burns might seem like an odd concept to the layman, but those who keep up with the cryptocurrency ecosystem know how important they are. A token burn is when a blockchain project destroys a portion of its tokens. It’s called a burn because it accomplishes two things: it reduces supply and increases demand (or at least it is supposed to — more on that later).
What is a token burn? 🤨
A token burn is the process of destroying a certain amount of tokens. It can be done by a company or by the cryptocurrency community in general.
A good example of a token burn is when Ethereum burned 100 million ETH tokens to create an incentive for miners to participate in the network. This helped improve the security and stability of the Ethereum blockchain.
Token burns are usually done to reduce the supply of tokens available on exchanges and other platforms, which often leads to an increase in price.
The process of burning tokens is usually accounted for in the smart contract behind a specific coin or token, so you don’t have to worry about how it works. Just keep an eye out for announcements from companies doing it!
Why would a company/project burn tokens? 💡
There are many reasons why project teams choose to do so:
➢ Increase the value of their cryptocurrency: By reducing the circulating supply of tokens, they hope that this will increase demand and drive up prices — making each coin more valuable than before. This can also help in fundraising campaigns where they need to sell off some of their holdings so they can continue developing their product or service (which is often what investors want).
➢ Refund unsold tokens during an ICO: During an ICO sale, sometimes not every investor wants to buy into your project. For example, if you sold 100 million tokens at an initial price of $0.10 each (1 billion total), but only sold 5 million during your sale (50 million total), then you would have 95 million unsold tokens. This means that you’re left with a bunch of tokens that no one wants or needs — they just sit there taking up space. In order to make these useless tokens more valuable, some ICOs try to refund them back to investors or burn them off so they can’t be used again.
What are the benefits of burning tokens? 📍
Burning tokens is a great way to increase the value of your coin. By burning a portion of all coins, the supply decreases and demand increases. This is because fewer coins are left over to be sold on exchanges. If you want to keep selling your tokens, it would be better to burn them instead of selling them on an exchange.
Burning also has an important role in building trust with investors and encouraging them to hold their tokens longer rather than sell them immediately after purchasing them.
There are two types of token burns: voluntary and “forced” burns. A voluntary burn occurs when a company chooses to destroy some of its tokens for any reason it wants, for example to pay for taxes or to reward its employees.
➢ A forced burn happens when there are not enough tokens in circulation to cover all transactions on a particular platform or exchange. For example, if someone wanted to sell 100 ETH worth of tokens but there were only 100 ETH worth of buyers, then the sale would be rejected by the platform until more buyers appeared with sufficient funds available in their accounts . To prevent this from happening, the platform might choose to destroy some of its own tokens. This would increase the number of available tokens and allow more transactions to take place.
➢ A voluntary burn, on the contrary, is when a blockchain project decides to destroy some of its own tokens, either by burning them or sending them to an address that can never be accessed. This can be done for various reasons, such as increasing the cryptocurrency’s scarcity and value.
A token burn step-by-step 🤝
There are three steps to a token burn:
1. The token issuer (such as a company or foundation) must make sure that its smart contract can receive ether from users and burn them automatically. This is usually done by creating a separate smart contract that has no other function than receiving ether from users and burning it. This can be done through a self-executing function, which allows the user to send ethers to the contract and then automatically executes a function that burns those same ethers.
2. The token issuer must announce when they will be conducting the burn, so that users know when to send their ethers into this smart contract in order for them to be destroyed forever. By announcing this well in advance, there is enough time for users to plan ahead and not miss out on any opportunities because they did not have enough time to buy or sell tokens before or after the burn event takes place.
3. After the burn has occurred, all relevant parties should confirm that it happened successfully (by checking their own wallets).
Conclusion 😃
What you need to remember from this article is the 3 types of burn :
➢ Burns as part of an initial coin offering (ICO)
➢ Burns to reduce circulating supply (decrease supply)
➢ Burns to increase value per each individual token (increase demand)
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