What Is Crypto Burning?
Given that digital assets are, well, digital, what exactly do blockchain enthusiasts mean when they talk about crypto burning?
Crypto burning occurs when a project behind a specific currency destroys its own tokens. Despite the name suggesting it, no one actually sets any crypto on fire here. However, they do pull it from the market and make it unusable, which is pretty much the same as soaking a portion of your paycheck in gasoline and watching it burn in flames.
Crypto burning is not a new practice – its core concept has been around for quite some time, and Wall Street players have been using it to step up their trading games. Stock buybacks are essentially a shareholder remuneration type where a company uses cash to repurchase its own shares on the open market. It could be a good thing if the company in question returns that money (value) to the shareholders and manages to increase the price of their stock by controlling the supply and demand.
Just like stock buybacks, crypto burning has a similar purpose. It could be used to drive demand by cutting supply, but it has other purposes within the blockchain ecosystem.
What Actually Happens When You Burn Crypto?
Now that we understand the basics let’s explain what burning cryptocurrencies entails.
Simply put, burning is a term for sending a specified and pre-determined amount of crypto to a place (digital crypto wallet) from which no one, not even the project founders and developers, could retrieve it.
These wallets have an address – also known as “burn” or “eater” address – but don’t have a seed phrase. And without a seed phrase to unlock access to your funds, the wallet, and the crypto in it, are utterly useless.
Whether it be crypto coins or tokens – once they get sent to the burning address, there’s no coming back. In that case, they’ve effectively been removed from the market – they’re locked into a wallet with no seed phrase, and although they still exist, no one will ever be able to access them.
Now, developers don’t do it “just because.” There are many reasons project founders may choose to burn their own crypto – sometimes burning happens due to stakeholders needing to drive the price up, other times to promote mining balance or curb inflation by bringing more order to the already hectic market.
More importantly, there are no rules as to which crypto can be burned or not. Any cryptocurrency can undergo a good burning, but whether it will happen boils down to the founder’s objectives and decisions. So far, Ethereum is the most popular crypto player that practices crypto burning, and many other projects have joined the wave, but more about that later.
Advantages and Disadvantages or Crypto Burning
Project leaders and developers could opt for crypto burning practices for a variety of reasons. In most cases, it’s proven to have more advantages than disadvantages. However, it’s not rare for crypto burning to produce unwanted outcomes and jeopardize the faith of an entire crypto project.
Still, let’s begin with the positives. We burn crypto with the following aims:
Control over supply and demand: The Web 3.0 world has proven many, many times that scarcity, uniqueness, and innovation behind a digital asset play a significant role in driving its value. The more people can have it, the less we value it. Just look at ADA coins – they aren’t worth much partially because there are roughly 45 billion ADA coins in existence, with almost 34 billion being available to market holders. That’s a lot of coins.
By burning coins (not talking about ADA anymore), your currency could rise in value. Many coins see long-awaited positive price movements after an initiated coin burn. That happens because now that there are fewer coins in circulation, scarcity makes it instantly more desirable. In theory, at least – it’s not always an effective strategy.
Keeping the peg alive: Some algorithmic stablecoins rely on crypto burning to keep themselves pegged to another asset, usually a dollar, at a certain price. However, this method raised many questions after the Terra collapse. Now that Terra is no longer a promising project, or a project at all, we can say that it’s impossible to keep the peg alive through coin burning only. But it sure could be an excellent addition to other methods that could pave the way to a stable currency peg.
Controlling the asset supply: Ethereum used to rely on crypto burning to change the way transaction fees were calculated; The system was also implemented to control the ETH supply. Unlike BTC or ADA, ETH isn’t limited in supply. So, to prevent to coin price from going to shambles, Ethereum developers have, so far, burned almost 3 million coins, taking billions and billions of dollars off the market and therefore keeping ETH one of the most lucrative and attractive investments.
Now that we’ve covered the positives let’s talk about crypto burning disadvantages.
Burning doesn’t always drive the price up: The crypto market pays no attention to your intention. In other words, no matter what people behind crypto projects do to drive the price up, sometimes market conditions and price movements just won’t move in their favor. Despite being a viable method many to this day use to drive the price of their coins up, nothing guarantees that their plan to make tokens more appealing will succeed.
Taking into account that crypto burning permanently locks coins in an impenetrable wallet, developers’ attempts to drive the price up could result in a disaster.
For starters, if the crypto burn didn’t initiate positive price movements, they would’ve lost vast amounts of crypto that could’ve been used for project improvement. Secondly, they can’t get it back. And the worst part is, the crypto market still won’t show any mercy.
Despite having more advantages than disadvantages, crypto burning could still cost the project a fortune. That’s one of the main reasons this process doesn’t happen overnight – it requires significant changes and planning. And still, one wrong move, and a good portion of your precious crypto is gone.
Which Projects Destroy Their Cryptocurrencies?
Many cryptocurrency project teams are burning their coins. Still, Stellar, Binance Coin, and Bitcoin Cash pioneered crypto burning. These projects effectively reduced the market supply and, at the same time, managed to improve the performance of their coins.
When projects such as Stellar, Bitcoin Cash, or even Ethereum burn their coins, they don’t have a special stash designed only for burning. Instead, project teams can take regular crypto-burning tokens from pretty much random sources.
For example, coins belonging to validators or profits earned from collecting network fees could be sent to the “eater address”. But, of course, that all depends on what the team behind the project decides. The only rule is that they can’t take your crypto. That would’ve been ridiculous, right?
Additionally, anyone can hop on the blockchain explorer and dig for info on which projects burn tokens or how much they’ve already removed from circulation.
Ethereum is currently one of the most famous “crypto burners.” The decision to burn crypto makes ETH a deflationary cryptocurrency – the supply deflates, making the demand consistent. Shiba Inu coin also dabbles in crypto burning, and so does Polygon, with its MATIC token.
No matter how many projects are burning their crypto, one thing’s for sure – crypto burning could be a good way to artificially increase a coin’s price. After all, you must sacrifice something to appeal to the crypto gods.