Burning tokens. How does it work and what does it do?


There are several compelling reasons for burning tokens, both technical and economic. This can easily help raise the asset. The logic is simple: the more coins there are in circulation, the lower their value will be. But this rule does not apply to all coins, as in the case of Ethereum and Cardano, which have unlimited emissions.

How does the burning of tokens on crypto exchanges work

The process by which virtual assets are intentionally destroyed involves withdrawing a number of coins from circulation. When assets are irretrievably burned, they will never be used online again. There are a couple of reasons:

  • The cost of the asset increases. When the current becomes smaller and demand remains stable, there is a deficit. The remaining tokens become more in demand and therefore increase in price.
  • Some payment networks may create new digital assets in unlimited quantities. As a result, coins are overabundant and the price of coins is reduced. Because of the existence of incineration, the quantities can be controlled to avoid devaluation.

What are the options for burning tokens?

  • Incineration occurs directly on the purse. The management of the exchange whose token intends to burn creates a separate address, on which transactions are carried out. No one will have keys to their wallets, which means no one can use the tokens.
  • Specialized applications. Such a program has the function of destroying a virtual asset. She just transfers money to purses that don’t exist.
  • HardFork. When blockchain changes are introduced, a new cryptocurrency can be created, and in doing so, digital assets that can be burned can be discarded.

The most popular site, which incinerates tokens, is the Binance cryptocurrency exchange. It is worth mentioning that last year the exchange successfully burned 2.2 million tokens with a total value of $68 million. The Binance site was also testing its new system, which was designed to take much less time to burn. No further details are yet available. It seems that the site is going to abandon its tactic when the stock exchange spends 20% of its profits quarterly to buy back some coins and then burn them.

In addition to Binance, one of the largest USDT current incinerations took place in 2020. The total was around 102 million coins. It is not known why so many tokens were burned. The company did not reveal the reason.

Also at the end of last year, the Exmo crypto exchange also burned coins. This decision was made due to the fact that the platform was unable to sell its tokens during the IEO. Then the management burned 80 million EXM tokens. Everything was done in one transaction.

There are cases when an exchange offers its users to take part in the process of burning tokens. For example, the Coinsbit platform. After that, users who have taken part can receive a certain rank from the exchange in return. What rank will be obtained depends on how many tokens were burned.

Based on all this, it can be understood that the burning of toxins is commonplace for many exchanges. Crypto exchanges periodically conduct such a procedure, informing their investors and traders in advance.

What advantages do developers have?

When the total number of tokens decreases, developers can get a good profit. But then they need to sacrifice some of their income or savings. Such a sacrifice is needed for the future success of a digital asset. The burning of tokens can be compared to when a company buys its own shares to stay afloat.

Why are tokens burned?

As we have written before, the burning of tokens is done in order to raise the price of an asset and to fight inflation and depreciation. In addition to these reasons, there are a number of others worth mentioning.

Bug fixes

There are cases when the token developer can release a product into circulation with some error. Such an error can be eliminated only by burning the token. Such bugs include: too many issued assets, an incorrect address or an increase in the issue.

Therefore, in order to avoid such problems, the developers simply send a certain amount of toxins to a wallet that they will not have access to. In general, the word “Burning” does not need to be understood literally. Virtual assets will not cease to exist, they will simply be stored in a place inaccessible to anyone.

Payment of dividends

Sometimes a project can issue a Security token (a security token) and the holders of such a token can count on dividends from the developer. Historically, after the tokens are burned, the price rises for them. Such an increase can act as an indirect payment of dividends for the holder.

Conclusion

As stated in the article, the burning of tokens is a standard procedure for sites. This is not a bad thing, as exchanges simply fight asset depreciation as well as inflation. Moreover, any user can obtain a profit from this, either as the same title or if he is a coin holder, from the increase in the value of the token.

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