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In cryptocurrency and the blockchain industry, there are some nuanced features that offer a different way to approach money and investment than traditional cash. One of these is the fact that users own their funds – and truly own them. Unlike traditional reserve fiat currency – where the bank owns the money and has overall control of it – in cryptocurrency you have total control of your assets and what you do with them.
With this, a user has the power to destroy their tokens. It’s not common, but crypto token burning has some use in the crypto ecosystem.
What is crypto token burning?
To burn a cryptocurrency token means to destroy it permanently. This can be done by anyone who wants to destroy the funds they own by sending the tokens to something called a burn address. This address is frozen and locked which means that coins cannot be restored once sent there.
A burn address has no private keys to access the funds, meaning no entity will be able to get to the tokens once they have been sent to the wallet.
So, basically, token burning means storing money in a safe and locking it but the safe has no key to get back in.
What is the point of crypto token burning?
The main purpose behind crypto token burning has to do with supply and demand. The higher the demand and lower the supply, the greater the value of an asset. If there is too much supply and not enough demand, the value of an asset sinks. This fundamental law of economics plays out in cryptocurrency and we can see how Bitcoin’s capped supply (only 21 million BTC can be minted) affects how investors perceive its value.
Increasing token value is one reason why token burning takes pace, another is to maintain the stability of the price of a token, and some cases of token burning is as part of the creative process. This is most common in NFT projects and collections.
Reasons why people burn crypto tokens
Stablising the value of a project
Stablecoins have become a crucial component of the cryptocurrency and DeFi ecosystem. They offer a holy-grail-in-between asset, offering the perks of crypto and the stability of fiat or traditional currencies. To regulate the supply of crypto that’s in a stablecoin project helps regulate the stability of the value. This means the supply keeps up with the value to make sure it’s constant.
Increasing the value of a project
The idea of supply having an impact on value is not new, particularly when it comes to finance. Public corporations participate actively in corporate buybacks, which involve the company purchasing some of its own stocks and shares from the market in an effort to boost the value of the supply that is still available. So one can consider token burning as the same sort of thing as a buyback, but with crypto.
When Banksy shredded ‘Love is in the Bin’ after it sold at the Sotheby’s auction, it increased the value of the piece, despite being destroyed.