“Value of a cryptocurrency or any asset is based on its total supply. The higher the supply, lower the demand and hence lower the value. The same is true for the other way around. Token burning mechanism was introduced into the cryptocurrency world on the basis of this notion only.”
What is Token Burning and how is it Done?
Every cryptocurrency token has a Total supply. Bitcoin has a total supply of 21 Million BTC, Cardano has a total supply of 45 Billion ADA. The supply of a token defines its demand and also its value. The higher supply of a coin will result in lower demand and vice versa.
Thus, a token burning mechanism has been introduced in the cryptocurrency world where a number of tokens are removed from the total supply of that token. Every cryptocurrency token can be burnt and it is as per the decision of the creator of the currency how many tokens are to be burnt and in what situations.
The Burning of token is achieved by transferring the amount of tokens to be burnt to a wallet without a private access key. As there is no access key, these tokens are not accessible by anyone and are permanently lost removing the tokens out of circulation. Ethereum has recently included a burning mechanism into their blockchain network by burning all the ethereum that are obtained as base fee for transactions.
What are the Benefits of Token Burning?
There are a number of benefits of token burning and they are as follows:
Makes a Currency Deflationary
The token burning mechanism makes a currency deflationary by removing the amount of tokens burned out of the circulation. This can lead to decreased supply of the currency overtime.
Increase Demand of the Currency
The token burning mechanism makes the currency deflationary and hence results in increasing the demand of the cryptocurrency. Over time as more tokens are burned, less supply will be remaining for all the users that demand the cryptocurrency. Bitcoin for instance has a total supply of 21 Million BTC for already a population of 7 Billion people in the world. The reason for the demand is clearly evident.
Increase the Value of the Currency
Though the value of a currency is determined by the use cases it has and how secure it is, token burning mechanism acts as a catalyst in increasing the value or the price of the cryptocurrency. As more and more tokens are taken out of the circulation, value per token rises due to the supply shock and rising demand.
The token burning cannot be faked or the tokens cannot be retrieved from the wallets. The wallets for burning are specially designed without an access key resulting in the permanent loss of the tokens but as every transaction is entered on the blockchain ledger, everyone can see the transaction occurring and the wallet balance, but cannot access the contents.
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
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