Token burning has become a common tool among cryptocurrency projects, exchanges, and artists. This article explores what it is and what purposes it may serve.
What Does It Mean To Burn A Token?
Burning a token means permanently removing tokens from circulation. This is done by sending them to a special address called a burn address, which has no private keys, making it impossible to recover.
Why Projects Burn Tokens?
At first glance, destroying valuable assets may seem strange, but there are solid economic and strategic reasons behind it, such as:
1. Increasing scarcity and value. By reducing the total number of tokens in circulation, remaining tokens can become scarcer, which may drive up their value if demand remains steady or increases.
2. Creating stability. Some tokens use burning as part of their mechanism to maintain price stability. For instance, algorithmic stablecoins may automatically burn tokens when the price drops below a set threshold, helping to keep the value stable.
3. Experimenting with value. Artists and innovators use burning to challenge ideas of ownership and scarcity. For example, NFT artist Pak launched burn.art, where collectors could burn NFTs in exchange for ASH tokens.
How Does Token Burning Work?
While details may vary for each project, most burns follow a clear process:
1. Initiation: the holder (individual, company, or smart contract) decides to burn tokens.
2. Transfer: tokens are sent to a verifiable burn address with no private key.
3. Verification: the transaction is publicly recorded, ensuring the burn is transparent, permanent, and traceable.
Token burning is more than just destroying digital assets; it is a strategic economic tool influencing the value and stability of crypto projects. By increasing scarcity or achieving other objectives, token burning reshapes the perception and dynamics of digital assets.
