Token burning is a common word in cryptocurrency. Altcoin and Stablecoin can be burnt in certain situations and reasons.
To a newbie in the cryptocurrency space, token burning might sound strange and unnecessary which is why it is crucial to understand what token burning means.
In this article, we will answer the questions “ what is token burning? and what are the benefits of token burning?”
What is Token Burning
Token burning is a way of removing a certain amount or percentage of crypto tokens from circulation. Project developers can burn a token by transferring the amount to be burnt to a burn address that is frozen and private forever.
The token sent to these burn addresses can not be retrieved, sent out, or sold as there is no private key or recovering phase to the address. Any token that is burnt is automatically non-existent and cannot be counted as part of the token available amount and figure.
Another way is by limiting transactions in its network. Simply put, a burnt token is a destroyed token, the act of token burning doesn't in any form suggest that it is weak or a scam.
Tokens such as BNB have been burnt, and Stablecoins such as USDT have also been burnt. You may wonder, why are tokens burnt?
Token burning is a method of reducing the number of tokens in circulation to maintain demand and supply. But then, does this mean that token burning is beneficial?
What are the Benefits of Token Burning?
As earlier said, one of the reasons to burn a token is to maintain the demand and supply of beneficial tokens. Not that a product is more valuable when there is less supply and high demand; this is possible in cryptocurrency through token burning.
The following are benefits of token burning:
- It increase the value of a token by reducing the supply of that token.
- Helps to ensure that the token is less fluctuating and attains the required value.
- It ensures the sustainability of a token and helps build more trust in the community as the value of the coin increases for both owners, investors, and airdrop owners if available.
- It can also benefit individuals as they can weed out unwanted airdrops and tokens from their wallets through token burning.
- It elaborates on ownership and freedom in the crypto space.
Does Token Burning Increase the Price of a Token?
Recall that token burning increase a coin's value, value is counted as price. When the value of a crypto token increases, the price is expected to increase.
The crypto space is highly volatile and as such the price of a token can drop, to increase the price and compensate investors, the token can be burnt to reduce the supply in respect to increasing the demand.
An increase in the price of a token is also attributed to the benefits of token burning. But it should be noted that if the demand for the token after it is burnt is not high, there might be no increase in price.
Token burning is an integral part of cryptocurrency and it is beneficial. The method is adopted by existing projects or new ones to ensure sustainable circulation and to ensure balance.
Most researchers take note of the number of a token burnt while listing before investing in a project.