What Is Coin Burning?
Coin burning is an intentional and permanent removal of coins or tokens from the cryptocurrency‘s total circulating supply by sending them to a burn address permanently so that they cannot be retrieved. Reducing the number of coins or tokens in circulation is deflationary to the overall fixed supply, as no more are created after the total is reached. This is designed to support their value as demand increases.
What Does It Mean to Burn Crypto?
Coin burning is likened to corporate stock buybacks, in which companies that are publicly listed on stock exchanges repurchase their own shares. As the company cancels the shares and reduces its overall share count, its net profit per share rises, strengthening the stock’s value to shareholders.
Coin burning is also seen as similar to the way in which central banks remove physical coins or notes from circulation to adjust a currency’s availability and purchasing power.
Several cryptocurrency projects regularly engage in coin burning, which permanently destroys the coins or tokens.
How Does Coin Burning Work?
Cryptocurrencies run on blockchain technology that uses asymmetric cryptography to validate and secure transactions. Cryptocurrency wallets use a pair of digital keys that are generated automatically – a public key and a private key.
- The public key acts as the wallet address;
- The private key is used by the wallet holder to access the content – much like an email address is used to send and receive messages, and the password is only known to the account owner.
Each transaction between cryptocurrency wallets is recorded permanently on the blockchain.
This means that any and all cryptocurrencies can be burned. Coin burning works by sending the coins or tokens to a so-called “burner” wallet address, or public key, with an unknown private key. The wallet can receive coins or tokens, but they can no longer be retrieved or used. In effect, a coin burn locks away the crypto and throws away the key.
As each wallet transfer is recorded on the blockchain, there is verifiable proof that the coins or tokens have been sent to the address and removed from circulation.
Blockchain and crypto projects can take different approaches to coin burning. Some projects detail their intention to burn coins in their whitepaper ahead of their launch. Others introduce coin burning at a later stage as the developers change their plans or in response to community voting. Some project developers have burned unsold coins and tokens following an initial coin offering (ICO).
Burning can be a one-off event, take place in several stages, or run on a regular schedule. Developers or crypto holders can burn coins and tokens manually, or protocols can burn them automatically.
Some projects set aside a portion of the crypto supply for burning, others buy coins or tokens from the market and send them to burner wallets, and some burn part or all of the transaction fees they receive.
Some blockchain protocols have a built-in coin-burning consensus mechanism that burns the cryptocurrency when needed.
Algorithmic stablecoins automatically create new coins and burn them to maintain their pegging, such as to the U.S. dollar (USD). For instance, if demand for the stablecoin rises and the price moves above the dollar peg, the smart contract automatically issues new tokens to increase supply and bring the price back down. Conversely, if the price moves below the dollar peg, the smart contract burns coins to reduce supply and support the price.
What Is Proof-of-Burn (PoB)?
Proof-of-Burn (PoB) is a type of blockchain consensus mechanism similar to the popular Proof-of-Stake (PoS) approach in that coins are used to secure the network.
While PoS requires holders to stake – or lock – their coins to the blockchain to become validators, PoB requires them to burn a certain number of coins. Validators receive a share of the transaction fees and new coins as a reward for destroying their old coins to validate transactions and adding new blocks to the chain.
Blockchains using PoB protocols include Ripple, Counterparty, and Factom.
Why Do Some Crypto Projects Burn Coins?
Coin burning has become increasingly popular since 2017 when several projects, including Binance, Bitcoin Cash, and Stellar Lumens, burned coins to cut supply and lift prices.
Newer projects with total token supplies into the quadrillions have adopted coin burning as part of their development roadmap.
What Are the Benefits of Coin Burning?
Introducing scarcity to a cryptocurrency aims to increase the value of the remaining tokens in circulation. It also allows crypto project developers to artificially raise the value of their coin or token from a low base once buyers have invested.
Other benefits include:
- Controlling supply inflation
- Increasing investor confidence
- Incentivizing validators to continue holding coins
- Complying with protocol consensus
- Maintaining liquidity
- Protecting against spam and malicious attacks
Coin Burning Examples
Below we take a look at some of the examples of cryptocurrencies that have implemented coin burning.
Shiba Inu (SHIB)
Coin burning has been central to the circulation of the Shiba Inu (SHIB) token. SHIB launched in August 2020 on the Ethereum blockchain with a maximum supply of one quadrillion. The project’s anonymous developers sent 50% of the supply – 500 trillion tokens – the public wallet key of Ethereum co-founder Vitalik Buterin. However, Buterin burned 40% of the supply, as he did not want the responsibility of holding such a large supply of tokens from another project.
SHIB launched at a price of $0.000000000056 and quickly took off as a popular meme coin, attracting an online community known as the ShibArmy. In 2021, SHIB’s developers introduced a coin-burning mechanism in response to community feedback requesting that the circulating supply be reduced further to drive up its value. The price reached an all-time high of $0.00008819 in October 2021.
The burn portal allows SHIB holders to manually burn tokens in exchange for rewards from RYOSHIS VISION, another Ethereum-based token in the Shiba Inu ecosystem. Owners of $burntSHIB receive a distribution of 0.49% of all RYOSHI transaction fees.
According to the ShibBurn website, more than 410 trillion SHIB tokens have been burned from the circulating supply.
Cryptocurrency exchange Binance introduced an automated quarterly coin-burning program in 2017 when it launched its native Binance Coin (BNB).
BNB has a maximum supply of 200 million, and according to its whitepaper,
BNB’s smart contract includes the Auto-Burn mechanism, which automatically adjusts the amount of BNB burned based on the coin’s price and the number of blocks generated on the Binance blockchain during the quarter.
In November 2021, Binance added a new mechanism to also burn a portion of the BNB Chain transaction fees to speed up the process, which had been slower than expected.
In addition, some BNB holders who have lost tokens by mistakenly sending them to the wrong address can count them towards the burn and receive reimbursement under the BNB Pioneer Program.
- Ethereum (ETH): Ethereum implemented a fee-burning mechanism through its upgrade to Ethereum 2.0 and transition to a PoS consensus algorithm. A portion of the fees from each transaction is burned, effectively reducing the total supply of ETH.
- Ripple (XRP): Ripple periodically conducts token burns of its native XRP coin by placing a small fee on each transaction made on the XRP Ledger. Ripple permanently removes the collected fees from circulation, reducing the overall XRP supply.
- TRON (TRX): TRON regularly conducts coin-burning events to reduce supply, burning a portion of TRX held by the TRON Foundation to increase scarcity and potentially lift the value of the remaining tokens.
- VeChain (VET): VeChain periodically conducts token burns as part of its economic model to help control inflation and ensure the scarcity of VET tokens over time.
What Are the Limitations of Coin Burning?
While the primary reason to burn cryptocurrency coins and tokens is to drive up their value, there is no evidence of a direct correlation between coin burning and higher prices. Other factors, such as market sentiment and the use of blockchain applications, can have more of an influence on a cryptocurrency’s value.
Some of the other concerns include:
|Perception of manipulation||Coin burning to artificially boost the value of the remaining tokens can be viewed as manipulative, which can negatively affect the project’s reputation and credibility.|
|Regulatory concerns||Authorities can scrutinize coin burning, particularly if it is seen as a means of manipulating token prices.|
|Potential supply imbalance||Excessive or frequent coin burning without careful planning can create an imbalance in the crypto ecosystem. If the supply is not appropriately managed, it can affect the crypto’s functionality and utility.|
|Lack of reversibility||Once tokens are burned, they are removed from circulation permanently, which can pose risks if there are unintended consequences or changes in the project’s needs in the future.|
Coin burning takes cryptocurrency tokens and coins out of circulation permanently, similar to the way in which companies buy back shares from the stock market. Burning can be applied manually or automatically by users as well as developers.
It aims to increase scarcity by reducing supply, driving up the crypto’s value, and encouraging users to hold it for the long term.
However, it is worth noting that a crypto price does not necessarily rise immediately following a burn, as other news and events can have a greater impact on the market. It can also be perceived as manipulative, depending on investor and user sentiment and how the burn is applied.