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Why Blockchain Projects Burn their Cryptocurrency Tokens

There is fire on the mountain and nobody seems to be on the run — Asa

What is Token Burning?

Token Burning is usually an intentional action taken by the developers of a particular cryptocurrency coin to “burn” (remove from circulation) a specific amount of the total available tokens in existence and circulation. Simply put, token burning refers to the permanent removal of some of the existing cryptocurrency coins from circulation. The goal is usually to reduce the existing number of tokens available. While it sounds extreme, the burning of tokens does not mean they are being literally disintegrated. Rather, it is a process which renders them unusable in the future. This process involves the project’s developers repurchasing or taking some of the available currency out of circulation. To do this, the tokens’ signatures are put into what is known as an “eater address” which is an irretrievable public wallet that can be viewed by all nodes but permanently frozen. Thus, permanently removing them from circulation. Of course, the status of these coins is usually published on the blockchain for all to see.

Over time, the practice of burning has become quite common in the industry. Companies like TokenPocket, Newdex and Binance, to mention a few, engage in token burning at regular intervals. In fact, Binance recently conducted its 10th quarterly burn (October to December 2019) which amounted to about 2,216,888 BNB being burnt. Consequently, the burn permanently took away about 38.8 million USD worth of BNB out of circulation. Newdex, on the other hand, engages in a monthly burn (one time every month = twelve times in a year). During the 2019 calendar year, 89,169,885.7335NDX were burnt.

While the concept itself is very straightforward, there are different ways in which projects go about burning their tokens. The process of token burning usually varies depending on the reason for the token-burning process.

BOSCore community burned 43.95 million unclaimed BOS tokens initially distributed in an airdrop to EOS account as part of their plan to move on with development and promotion of BOS. The EOS community burned over 34 million EOS tokens that were designated for worker proposal funds because they thought it was not needful and they wanted to prevent those funds from being abused.

While some projects perform a one-time burn shortly after their ICO in a bid to remove unsold tokens from circulation as an incentive for those who participated in the ICO, others may burn coins periodically at either fixed or variable intervals and volumes. For instance, Binance burns its tokens quarterly as part of its commitment to attaining a total of 100 million BNB tokens burned. The volume of coins burned at each quarter depends on the number of trades which take place on the platform in that quarter.

Other projects, such as Ripple, burn tokens gradually with every transaction that takes place using the tokens (i.e whenever parties transact using XRP, one party can set a fee to hasten the execution of the transaction and once the transaction is completed, the fees are burned by sending them to an eater address). On the other hand, stablecoins like Tether (USDT), create tokens when they deposit funds into their reserves. They then burn the equivalent amount as funds are extracted or withdrawn. Despite the various ways in which token burning can be achieved, the consequence is usually the same: the burned tokens become unusable and effectively removed from circulation.

TokenPocket is on Fire!

The TokenPocket Foundation officially launched its Repurchase and Burn program on the 1st June 2019. The program simply involves the repurchase of TPT with 25% of the revenue made by TokenPocket foundation in the previous month and then burning the repurchased tokens to take them out of circulation permanently. Recently, the TokenPocket foundation carried out the 8th round repurchase and burn program of TPT. Having made an income of 13,631 EOS in December of 2019, 25% of this income has been used as a TPT repurchase destruction fund. As at the 10th January 2020, TokenPocket foundation had repurchased and burned 7,623,812.9 TPT (valued at $22,882) in the 8th TPT burn program.

As this is the eighth token burn, we may take a cursory look at the history of the burned TPT, with regards to the total value (USD) of the burned tokens, right from the first token burn to the eighth and most recent one.

1ST BURN (MAY 2019): $4,843

2ND BURN (JUNE 2019): $7,153

3RD BURN (JULY 2019): $11,930

4TH BURN (AUGUST 2019): $16,759

5TH BURN (SEPTEMBER 2019): $12,365

6TH BURN (OCTOBER 2019): $22,882

7TH BURN (NOVEMBER 2019): $9,882

8TH BURN (DECEMBER 2019): $10,785

Is Token Burning Beneficial?

Yes! Token burning is beneficial in many ways to both the developers of a project and investors in such a project. Generally speaking, token burning is carried out for deflationary purposes. It is often used by altcoins and smaller tokens to regulate the number of coins in circulation, Most projects burn tokens in a bid to maintain a stable value for their coins or give traders an incentive to hold their coins.

The major reason for burning tokens is to boost the value of each token by reducing the number in circulation. This is based on the theory that having fewer coins available for sale and on exchanges would translate to a higher value for each individual token as there would be fewer tokens in supply as opposed to demand.

By keeping a token’s value stable, countering token inflation or projecting the token price upward, token burning gives the hodlers or investors a greater incentive to hodl.

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Toju Kaka

Toju Kaka

#Author of Understanding EOS: https://amzn.to/3aPhBDA #Blockchain Consultant #Cryptocurrency Trader. Ex @OKx BD Manager for Nigeria