Burning Tokens: How And Why Is It Done?

The law of supply and demand assumes that when a service or commodity is scarce, its value begins to rise. In the world of cryptocurrencies, this principle underpins the burning of tokens. Many crypto projects are undertaking token-burning programs. Some do it regularly, while others do it once.

The practice of combustion is quite common in the industry and is very simple. Burning tokens is an action taken by the creators of a given project to remove a certain number of available tokens from circulation. Burning tokens is the permanent and irreversible removal of existing tokens from circulation, creating an environment for the value of the remaining tokens.

There are several reasons why tokens are burned. However, the ultimate goal is to create a token shortage with the hope of increasing its value. Larger projects such as Bitcoin and Ethereum do not need to use this mechanism. In contrast, burning is often used by altcoins and smaller exchanges. This way, they control the number of tokens in circulation. This brings significant benefits to potential investors.

Burning tokens have several unique uses and are used to achieve various goals.

How does token burning work?

The process involves purchasing or withdrawing a given coin from the project’s creators and then removing them from the market. The tokens are placed in a unique public known wallet, visible to everyone, but are blocked. The status of the tokens in it is published on the blockchain.

There are many different ways to burn tokens. The main difference between them is the purpose of the process. Some projects use a one-time burn after the end of an ICO (Initial Coin Offering) to remove unsold tokens from the market. Other projects choose to burn coins at constant or variable intervals periodically.

Reasons for the burnout of tokens

What makes it necessary to smoke cryptocurrency? There are many reasons, here are the most important ones:

Consensus mechanism

This is an exciting and unique way to achieve consensus in a distributed network. It applies to projects using Proof-of-Burn (POB) as a consensus mechanism. This requires investors to burn some of his coins.

Increasing the value of tokens

The ratio of demand to supply of a given good gives it value, and here it is cryptocurrency. Unlike fiat currencies, cryptocurrencies are deflationary in nature. The supply of most cryptocurrencies is constant, without “reprinting” coins once the supply is complete.

Burning tokens reduces the total supply in circulation as they are intentionally destroyed. It is an effective method of increasing and stabilizing the valuation of tokens. From an economic point of view, it is evident that reducing the quantity of a good in the market makes it more valuable.

How is the burnout of tokens proceeding?

As a rule, the combustion process is as follows:

  • the token owner creates a command for the token burnout process. By informing the smart contract that it wants to burn a certain amount
  • Smart contract checks whether a given user has the number of tokens indicated by him in his wallet. 
  • The number of value units indicated by the user will be automatically deducted from his wallet. 
  • The total supply on the exchange is reduced accordingly, and the displayed tokens are burned. It is an irreversible process, and therefore cryptocurrencies subjected to the burning process cannot be recovered.

How does it work in a real example?

An example of such an action is the Revenue Coin, which is a deflation token. The amount of RevCoins in trading decreases over time. This is since the Revenue Coin has a fixed resource of coins embedded in the smart contract mechanism and the model of reducing their quantity monthly.

Binance coin (BNB) works similarly to RevCoin. Each burning of BNB is associated with a rapid increase in its value on the exchange. Successive, constant reduction of RevCoin’s resources in trading (in an exponential way) allows you to estimate RevCoin’s supply in the future precisely.

The token’s value is steadily growing thanks to the fact that every month, 10% of the revenues of each portfolio company is allocated to the redemption of Revenue Coins available on the public market. Then 50% of the purchased RevCoins are destroyed (burned). The remaining 50% goes to the fund intended for future involvement in subsequent companies, which will allocate their revenues to increase the value of ReVCoin.

Each of the persons who will acquire tokens at the stage of conducting the Initial Coin Offer (ICO) will be able to put them into circulation. RevCoin is fully convertible into cryptocurrencies and traditional currencies (fiats) available on exchanges.

Burning tokens – perfect operation from a strategic point of view

How much is the burning of tokens beneficial for investors? Quick reply – very much. This is very profitable in the long run. Burnout causes part of the profit produced to be transferred to the target of reducing supply. Over time, it allows you to reduce the supply significantly and thus increase the price of tokens. Persons with assets on the exchange are informed in advance about the planned burnout. Therefore, they have more time to prepare for it and thus make more profit.

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