Token burning is when a cryptocurrency project permanently removes (or “burns”) tokens from circulation. It may sound a little extreme, but burning is common in crypto and often beneficial.
Why are tokens burned?
Tokens are usually burned for deflationary purposes – most cryptocurrency projects burn tokens in order to maintain their value. Cutting down the supply of a token can increase its value, as there will be fewer coins available to sell. If demand is high, its value will rise even more.
For example, back in 2019, the Stellar network burned 55 billion of its XLM tokens, drastically reducing its supply by over 50%. This resulted in the token’s value jumping from $0.069 to $0.088 in a single day.
How does it work?
There are several ways to burn tokens, but the most common approach is when a specific number of tokens are purchased, then transferred to a frozen private address, or a “burn address”. Once they have been transferred, they cannot be retrieved as there is no private key linked to the burn address. In other words, the tokens no longer exist and have now been burned.
Another example is how the Ripple network burns it tokens. It does so by reducing the number of transactions allowed on its network to prevent the possibility of a denial-of-service (DDoS) attack, which itself is a malicious attempt to disrupt the regular traffic of a server or network. Ripple also takes gas fees to speed up a transaction, which in turn reduces the supply of XRP in circulation for every transaction made.
How is token burning beneficial?
Aside from increasing a token’s value, burning can also be beneficial in incentivising investors to hold them.
When a network conducts a token burn, the decrease in supply results in an increase of value. Therefore, anyone who holds the token will immediately see an increase in the value of their holdings.
This makes token burning build a good level of trust and confidence in the community, with many crypto projects using it as part of their marketing tactics to attract investors.
So, despite the intense-sounding name, token burning actually does a lot of good for both tokens and their holders, since it can increase a crypto’s value.
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