Everything you need to know about Token Burns
Find out about token burns, how they are done and why are they important. Uncover the impact of token burning on crypto markets and implications for investors.
Token burning, also known as coin burning or token destruction, is a process used by cryptocurrency projects to reduce the supply of their tokens in circulation. The concept of token burning is based on the idea that reducing the supply of tokens can help to increase the value of the remaining tokens.
- Burning is done to remove tokens from the circulating supply
- Decreasing supply with steady demand means a higher price per token
- Tokens are burned by sending to an address with no private key - no way out
- Implicit burns occur with every transaction by burning a part of a gas fee
- Mass community burns can serve as a way to get more attention for the project
How are tokens burned?
The process of token burning involves sending a certain amount of tokens to an address where they can no longer be accessed or used. These tokens are essentially removed from circulation and are considered "burned." The burning process is often done by sending tokens to an address that has no private key, making the tokens irretrievable.
There are many formats for burn addresses and you can usually find them on chain scanners. Burn addresses on Ethereum-based chains look like this: 0x000000000000000000000000000000000000dEaD. Based on the generous amount of zeroes, this is also called a null address.
Chain Scanners with burn addresses:
The basic idea is that if the total supply is reduced and demand stays the same, or rises, the price will also grow because the token becomes more scarce. This is true in theory, however, to seriously impact the price it is required for multiple factors to play together.
To influence the price up to the point that you can actually see the difference, it is necessary to burn large amounts of supply at one time. This is often a community effort as large coordinated through social media have already happened. Big burns also have a secondary effect - they gain the attention of the public. It is later difficult to establish if the price increase was actually due to the burn or just a wave of speculation.
Some undesired outcomes
Excessive token burning can gradually result in insufficient liquidity in the ecosystem. Because burned tokens are removed from circulation forever, their lack may show up in the liquidity pools and/or centralized exchanges.
Some projects offer a specific function to burn as many tokens as users want. This function is sometimes incentivized with other tokens or ecosystem advantages (Higher APR, lower fees, etc.). In some cases, it does not grant the users any benefit and it is done just to show dedication to the project or for speculative reasons.
Implicit burn is a bit of a different approach, giving users and investors very little say if the token is going to be burned. Usually burning is integrated into a transaction fee as a percentage on a certain platform - this includes fees for swaps, depositing liquidity, minting NFTs, and so on. Every time a transaction occurs, some amount of that transaction is burned indefinitely.
The great advantage of this mechanism is its sustainable and gradual reduction of the circulating supply. However, it comes with higher fees, which may be a burden for some users.
Case Studies of Famous Burners
After the proposal EIP-1559 has been implemented, every transaction on the Ethereum network is automatically conducting an ETH burn. For every transaction, users pay a gas fee, of which a certain percentage is inevitably burned. This burned portion is called the base fee.
If the burned amount succeeds in staying higher than the issuance of new ETH, it will make ETH deflationary - meaning a long-term price increase.
Relies on bigger burns once every quarter (auto-burns). The burns are scheduled in advance, often causing them to be priced in, even before the actual burn happens. Binance has committed to burning a total of 100 million BNB until the maximum supply of another 100 million BNB remains.
Shiba Inu is famous for its enormously high supply. In order to maintain the price within a reasonable range a burning mechanism was implemented. Shiba Inu does not schedule any burns but rather relies on the community with supply reduction. There are multiple burn portals available for users, where any amount of SHIB can be burned at any time.
The new mechanism rewards burning SHIB with an incentive token burntSHIB, which can be further staked to earn rewards. The biggest burn in the history of Shiba Inu was conducted by Vitalik Buterin in 2021. After receiving half of the total supply of SHIB, he famously burned 410.24 trillion tokens and donated the rest to charity.
Is token burn good?
Yes, token burn is something you definitely want to happen, because it can positively impact your investments. Crypto projects with built-in burning functions usually have deflationary tokenomics, which means a long-term increase in value.
Can burned tokens be recovered?
No. Unfortunately, tokens that have been burnt don't have any means of recovery, because the wallet they have been sent to has no private keys and is therefore inaccessible from the inside. The unrecoverability is also a part of what gives token burn its power over the price.
Do you lose money when you burn tokens?
Yes, in the short term, with long-term potential for a price increase. When you burn your own tokens you are essentially removing them from the total supply and therefore increasing the scarcity of remaining tokens. However, if tokens are burned on a regular basis the price per token will increase, eventually compensating for the initial loss.
What does it mean to burn a token?
It means sending them to a so-called null address with no private keys. This address is kind of a black hole - tokens can enter, but they cannot be taken out.
Does token burn increase price?
Let's say that we have a certain supply and demand that translates to a certain price per token. Now, through reducing the supply (burning) we have a lower supply, but still, the same demand, which means higher buying pressure on the token and therefore higher price.