What is Token Burn — BitKan Learn
Why is sending tokens to a dead and inaccessible wallet a good idea?
Have you ever wondered why crypto projects often talk about “burning” coins? This practice involves permanently removing tokens from circulation, aiming to boost value by reducing supply. This article delves into the concept of token burning, its purposes, and its potential advantages and drawbacks of sending your tokens to a burning address.
Unpacking Token Burning
What Is It? Token burning refers to permanently removing tokens from the circulating supply. It’s a deflationary measure, aiming to enhance an asset’s value through scarcity. Token burns involve sending tokens to an unretrievable wallet, symbolising a project’s commitment. Token burns typically performed by the development team which can also buy back tokens and burn them.
Why Token Burns Matter
Benefits:
- Reducing availability
- Ensure mining balance
- Reward holders
- Elevate token utility
Token burns influence supply-demand balance, increasing value by reducing availability and serve to market an offering. Token burning’s benefits range from price recovery to stability and user incentives.
Disadvantages:
- Draw regulatory scrutiny
- May be perceived as price manipulation
- Irreversible
While token burning offers advantages, it also presents drawbacks. These include regulatory attention, manipulation suspicions, and the irreversible nature requiring meticulous planning.
Other reasons to burn tokens
Incentives for traders may not be the only reason for token burning. Some projects, such as Ripple, carry out token burns to add a layer of security and avoid spammed transactions.
What is Proof-of-Burn
Proof-of-burn (PoB) is one of the several consensus mechanism algorithms implemented by a blockchain network to ensure that all participating nodes agree to the true and valid state of the blockchain network. A consensus mechanism is a set of protocols that use multiple validators to agree that a transaction is valid.
PoB is often called a proof-of-work system without energy waste. It operates on the principle of allowing miners to burn virtual currency tokens. They are then granted the right to write blocks (mine) in proportion to the coins burnt.
To burn the coins, miners send them to a burner address. This process does not consume many resources — other than the energy used to mine the coins before burning them — and ensures that the network remains active and agile. Depending upon the implementation, you’re allowed to burn the native currency or the currency of an alternate chain, such as Bitcoin. In exchange, you receive a reward in the native currency token of the blockchain.
Ethereum’s EIP-1559 burn strategy
August 2021 marked a pivotal moment as Ethereum unleashed EIP-1559. This dynamic update introduced fee burning, a game-changer for ETH and its community. Through fee burning, ETH is burned each time the Ethereum network is used, causing the asset to be deflationary. The development was significant for its users. In the year after EIP-1559 was implemented, ETH’s inflation rate stood at 2.2%. If EIP-1559 were not been implemented, that rate would have been nearly double.
Final Takeaway
While token burning offers advantages like reducing inflation and promoting holding, it also has downsides that we discussed in the article. Despite these issues, token burning’s potential benefits for both holders and projects remain notable. However, challenges and risks do remain for the coin and its community to take on. BitKan would like to remind our readers and users to do your own research regarding the potential risks involved before investing in a project.
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