To demonstrate strength, reduce the number of tokens in order to influence their value or control a cryptocurrency's inflation. These are some of the reasons for carrying out a token burn—a way to remove digital currencies from circulation and control their price.
The technicians who specialize in controlling forest fires use the strategy of setting "technical fires" to contain the advance of the flames, avoiding the appearance of other flash points. They set fire to areas that, depending on wind direction and the terrain, are expected to burn in the fire. These intentionally burned areas are then gradually doused with water to prevent the main fire from spreading.
In the crypto ecosystem, a token burn is similar: a process by which cryptocurrencies are removed from circulation—which platforms use to control the value of the remaining tokens. Why choose this solution? What happens to the burned tokens? How is the market affected by the burn?
A token burn is a process in which cryptocoins are sent to a wallet that nobody can access, i.e., whose cryptographic keys have been destroyed.
A token burn is called a burn because it is analogous to burning physical cash (which is, by the way, illegal in some countries): in practice, that money is gone, lost within a virtual device that nobody can access.
Rationale behind token burning
There are several reasons why cryptographic tokens can be burned. One is voting, which entails the demonstration of a certain degree power within a platform. Voters burn some of their tokens to take part in that "democratic" process (one token, one vote).
But the main reason for burning tokens is to influence the value of the token by reducing the number of tokens in circulation. Token burns are done with the aim of reducing the amount of tokens in circulation, which in turn tends to increase the value of remaining tokens.
In addition, token burns can be used to control a cryptocurrency's rate of inflation or to reward existing token holders. For example, if tomorrow 50% of the world's gold were to disappear, the remaining gold would be worth more.
Unintentional token burns may also take place
Due to the characteristics of cryptocurrencies, unintentional token burns often occur. If a user loses access to the hard disk containing his or her cryptocurrencies, the cryptocurrencies are unrecoverable. In practice, they are burned, and thus can't be used. In 2021, it was announced that a programmer had lost access to a portfolio with 7002 BTC, about 200 million euros in bitcoins at that time. Looked at from this perspective, bank-based crypto-asset custody—such as that offered by BBVA Switzerland—is a key source of certainty.
Other projects
In 2019, the Tether treasury (a stablecoin) burned around 74 million USDT—equivalent to 74 million US dollars—to stabilize the price at 1 USDT = 1 USD. It is one of the leading stablecoins on the market.
By the end of 2022, Ripple had burned more than 10.7 million XRP since its inception. This free software project stabilizes its currency artificially, from an initial 100 million tokens.
An even more radical example of a token burn is Binance Coin (BNB), which burns the equivalent of 20% of its net profits every quarter, providing fuel to raise the price.
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